Unemployment and industrial output figures point to slow-down of Czech economic recovery

Amidst fears of a new wave of global recession, the Czech economic recovery shows signs of slowing down, with industrial output decreasing in June and unemployment on the rise in July. According to data released by the Labor Ministry, the unemployment rate grew slightly to 8.2 percent in July, the first time the figure has swelled since the start of this year. Similarly worrying is a slow-down in industrial output with a growth of only 7.4 percent year-on-year in June as compared to 15.2 percent in May. I spoke to the Raiffeisenbank’s chief economist Pavel Mertlík about the significance of these figures and how a possible global economic recession might affect the Czech Republic.

“If you look at the general situation on the Czech labor market, compared to other countries in Europe, using Eurostat figures, which are derived with a different methodology, the Czech unemployment rate is slightly above six percent, while the European average is about ten percent. So the unemployment situation in the Czech Republic is not so bad, however, we do not see any strong triggers for the increase of economic growth in the Czech Republic, on the contrary, so relatively high unemployment will persist.”

Another figure that was released yesterday concerned industrial output, which has slowed down. Why is that and what does it imply for the economy?

“It definitely manifests that the growth momentum is over, not just for the Czech economy, it is a global development. If you take forward-looking indicators like purchases, they are dropping down, in the United States, Europe, China and elsewhere. And if you look to the Czech Republic, this is reflected not only in our industrial output, but particularly in factory orders, which right now have increased by five percent year-on-year, but during the last two years, we saw figures of ten to twenty percent, twelve, fifteen percent growth figures year-on-year were normal.

Pavel Mertlík

“But since the beginning of the second quarter of this year, the new industrial orders dropped to figures of five to six percent year-on-year. So it clearly shows that the external is decreasing, or at least decelerating, and the industry is decelerating as such. So we expect that the economic growth will be similarly slow next year, whatever the global development will be, and certainly there is a risk of a new global recession, which has been heavily discussed in recent days and hours.”

You already alluded to the stock market plunge and the downgrading of the US credit rating. What further effects could this have on Europe, and especially the Czech Republic?

“As regards the Czech Republic, it is a small economy and very much dependent on the development in Europe and worldwide. One factor that works in our favor is that our public finances are in order, comparatively, and structurally, the economy is quite strong, for example for almost eight years, it has had a positive trade balance, it has very limited current account deficits, and so on. So the exchange rate is stable and the Czech koruna is appreciating, while the Polish Zloty, for example, is depreciating.

Photo: Štěpánka Budková

“It seems that investors understand this country as a small safe haven inside Central and Eastern Europe. The most difficult thing for the Czech Republic will be everything concerning our export possibilities. We are an export-oriented economy; the role of domestic demand in GDP formation is subdued compared to the dependence on exports, and those are basically going to Germany and from there to the rest of the world. So any contraction in demand in Europe can be very much felt in the Czech Republic.”