Czech "second dip" internal, unrelated to euro crisis

Petr Holub
27. 10. 2011 13:07
Czech economy is decelerating because of austerity-induced weak domestic demand, not euro crisis
Czech PM Petr Nečas with the duo of German and French leaders, recently dubbed "Merkozy" by European media (or is it "Sarkel"?)
Czech PM Petr Nečas with the duo of German and French leaders, recently dubbed "Merkozy" by European media (or is it "Sarkel"?) | Foto: Reuters

Prague - The Czech economy and public finances are heading for new troubles, and the government blames the ongoing euro crisis.

However, economic data do not confirm this hypothesis at all.

The Czech economy is decelerating even though it has not felt the European debt crisis yet. The only demonstrable cause of the slowdown is a drop in domestic consumption caused by the austerity measures implemented by the center-right government.

In the first eight months of this year, the sum of bank loans given to firms increased by CZK 39bil (EUR 1.57 bil). This is the fastest growth since the times of economic boom in 2005-8.

Fears of losing financial assets in Greece and other Mediterranean countries have not arrived to the Czech Republic yet.

Read more: Czech economy has good reasons to fear Greek default

Driven by export

Czech exports rose by 12 percent in the first eight months of 2011 - the main importers remain the eurozone countries. Czech exports to Germany, Slovakia, Poland, Hungary and Belgium grew by more than 10 percent in the same period.

The ten largest importers of Czech goods are all in Europe, and six of them in the eurozone.

Read more: Crisis 2.0? Czech export economy to rely on BRICS

Even the imminent debt crisis has not hurt the demand for Czech goods in Europe. Compared to 2010, only two countries have imported less Czech products this year - Portugal and Bulgaria.

In sum, there is only one worrying signal coming from the eurozone - the volume of industrial orders from other countries is decreasing. But in August 2011, it was still 5 percent higher than one year ago.

Read more: Double dip recession threat looms over Czech Republic
Read more: ANALYSIS: Will Czech economy withstand 2nd recession?

Something is rotten...

This means that most of the economic "bad news" come from within. Domestic consumption has been stagnating for four years, and fresh data from the Czech Statistical Office show that Czech households started the latest round of saving in summer this year.

This has negative effect on retail sales and services, which currently find themselves below their 2007 level.

Households are saving, and as such do not invest into real estate. This is the main reason why the Czech construction sector has shrunk 10 percent this year compared to 2010.

Even the Czech industry feels the drop of domestic consumption, with sales in the Czech Republic decreasing 2.5 percent this year, industrial orders plummeting by 10 percent.

Salaries have been growing only 1 percent annually in the last four years, and the imminent unemployment forces Czech households to prepare for the worst.

Way to go, Poland

The Czech government can look with envy to the north. Avoiding any drop in domestic demand has been the cornerstone of the successful economic policy of Polish PM Donald Tusk.

Poland, as the only European country, avoided slipping into recession in 2008 and 2009 precisely because the country managed to maintain the high domestic consumption level. This also prevented any significant decrease of the Polish industrial production.

Currently, Poland's domestic consumption, industrial orders and construction sector are growing fast.

The country has paid for its prosperity with a higher budget deficit. In 2010 it reached 7.8 percent GDP - three percent points higher than the Czech deficit.

However, this year the Polish deficit is expected to shrink by one third thanks to higher revenues.

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