ANALYSIS: Will Czech economy withstand 2nd recession?

Petr Holub
17. 8. 2011 12:12
Czech Rep's debt burden is light, but anemic domestic demand will be problem in case of second recession
In the time of austerity measures and imminent economic crisis, every cent (or Czech crown) matters...
In the time of austerity measures and imminent economic crisis, every cent (or Czech crown) matters... | Foto: Aktuálně.cz

Prague - New data on economic growth in EU shows that the European economy is slowing once again. It also appears that Czechs would be hit by an imminent Recession 2.0 more than they were by the 2008/9 slump.

The first crisis reached its bottom in spring 2009, and the subsequent recovery lasted two years. In that period, half of EU economies managed to undo the economic damage. The Czech Republic was among them.

Out of the 27 member states of the EU, 12 of them had better economic growth in the Q2 2011 than they had in the Q2 2008, shortly before the crisis erupted.

Read more: Crisis 2.0? Czech export economy to rely on BRICS
Read more: Czech jobless rate edges up, industrial output drops

Recovery driven by Germany

The center of the prosperity was Germany - the 12 "luckier" EU countries consist of Germany and its seven neighbors (France, Luxemburg, Belgium, Netherlands, Austria, Czech Republic, and Poland). Only Sweden, Malta, Cyprus, and Slovakia do not border with the Central European economic giant, and, in addition, Seven though Slovakia does not share border with Germany, it is located in the same sub-region of Europe, and its economy is strongly linked to that of Germany.

However, three of the 12 countries backed their recovery with debt equaling more than 10 percent of their economic output. The Czech Republic is among the remaining countries that avoided excessive debt.

The rest of the EU has not yet recovered. Six of them have an economic growth that is 7 percent lower than three years ago - Lithuania, Latvia, Romania, Slovenia, Greece and Ireland. These countries are usually seen as examples of countries that have "lived beyond their means", relying too much on foreign loans.

After they were denied foreign credit, their budget balances fell into deep deficits, and their debt increased by more than 15 percent in two years.

From the global point of view is crucial that no important economy has sunk into similar problems. Britain, Spain, and Italy have been able to avoid the worst - thanks to loans.

Together with Portugal, these countries are currently threatened by a debt crisis, which forces them to cut their budgets. Their economic stagnation will threaten the recovery in the rest of Europe. According to Bloomberg, the prime victims will be Eastern European states, which will lose important importers.

"Eastern Europe's export-led recovery from its worst slump since the end of communism two decades ago is in peril as a deepening debt crisis in the euro area and a cut in the U.S. credit-rating intensify threats to the global economy," said Bloomberg's Agnes Lovasz, adding that the drop in exports slowed down the economic growth in the Q2 not only in Germany, but also in all countries east of Germany with the exception of Austria.

Weak consumer demand

According to Financial Times Deutschland, the drop in exports constitutes a severe threat to the German economy. "The German customer, in spite of increasing employment, is consuming less and this does not add to the confidence that the domestic demand will offset the global slowdown in following months," warned Mathias Ohanian in the daily.

Eastern European states are threatened by the weak demand to an even higher degree than Germany. While in Germany the local consumption was growing at snail's pace in the last three years, in the post-communist countries it has fallen by a double-digit rate.

The domestic demand in the three post-communist countries that has successfully recovered from the crisis is on the 2008 level. In the Czech Republic, the demand significantly decreased at the beginning of 2011, as both the government and households started to save in fear of a higher budget deficit. Slovaks opted for the same strategy, so Poland is the only country of Eastern Europe that will be able to rely on its domestic demand in case of a new recession.

Consumers remain relatively fearless also in Sweden, Luxemburg, Belgium, and Austria.

On the contrary, if things get ugly, the Czech Republic may find itself in the company of Bulgaria, Denmark, Hungary, and Estonia, the countries that have kept their budget deficits under control, but pay for it in terms of economic growth.

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