Czech GDP Q1 2008

The Czech Republic's economy expanded 5.4 percent in the first quarter, the slowest pace in more than three years, as consumer spending waned. The preliminary growth figure compares with 6.6 percent in the previous three-month period, the Czech Statistical Office said today. Seasonally adjusted GDP growth was also 5.4 percent, while quarter on quarter the economy expanded 0.9 percent.



The expansion has faltered as household consumption was damped by higher indirect taxes and surging inflation, which has been above Ceska Narodni Banka's ceiling since November. Inflation has been driven by global increases in food and fuel costs and government measures that are beyond the bank's influence.

The increase of economic performance was partially connected also with higher employment. According to an estimate that used the results of the labour force sample survey in combination with currently available administrative data, seasonally adjusted total employment in Q1 2008 increased by 0.3% quarter-on-quarter and by 1.7% year-on-year. NSA employment was by 1.9% higher year-on-year.



A third of the increase of economic performance was due to higher employment; the remaining two thirds are attributable to the growth of total labour productivity. The trend of certain price segments varied considerably – a marked seven per cent price growth of household expenditure on the one hand, and by 1.3 p.p. higher decrease of export prices than of import prices on the other. These and other impacts partially compensated one for another so that the overall price level measured by GDP deflator increased by three per cent.


The decreasing effect of domestic demand on GDP growth, along with an appreciating koruna, has added to the central bank's optimism that the inflation rate will slide back to the mid-point 3 percent target by next year, from 6.8 percent in April. A strong koruna, which has gained 6.1 percent against the euro this year, has helped temper rising prices

Consumer prices grew more than 7 percent in each of the first three months of 2007 and a close to a decade high of 7.5 percent in February. Rising prices prompted the central bank to raise its benchmark two-week repurchase rate to 3.75 percent in February, the fifth increase since May 2007.

Czech Industrial Output March 2008

Industrial output data for March showed the first drop after 5-1/2 years of growth, adding to previous poor purchasing managers index (PMI) and foreign trade figures.
Output fell 2.1 percent year-on-year in March, far worse than a 4.8 rise forecast by analysts and in stark contrast to an 11.3 percent rise the previous month.
The Czech data mirrored March results elsewhere in emerging Europe. In Slovakia, the region's growth leader, output slammed on the brakes to grow just 1.8 percent.
Part of the drop could be attributed to the Easter holiday, which came earlier than usual this year.

Czech Unemployment April 2008

The Czech unemployment rate fell in April, reinforcing concerns that the tight labour market poses a serious risk for the development of inflation.

Unemployment fell to 5.2 percent in April from 5.6 percent in the previous month, and in line with expectations in a Reuters analyst poll, data from the labour and social affairs ministry showed. Year-on-year, unemployment fell from 6.8 percent registered in April 2007.

Wages in industry are growing growing above 11 percent which reinforces the Czech central bank's concerns that the tight labour market and growing wages are the key upside risks to inflation.

On April 30, 2008 job offices registered altogether 316,118 job seekers. That is by
20,179 less than at the end of March. The number of job seekers decreased by 86,814 persons compared with the same period of the preceding year. The number of available job seekers job seekers currently available for work) was 292,465.




In the course of April, job offices registered altogether 42,515 newcomers. That is by 4,484 job seekers more than in the preceding month and by 1,659 newly registered job seekers more than in April of the preceding year. In April, job offices registration was terminated with 62,694 seekers. New jobs have been taken up by – 42,596 persons. In the course of the above-said month, job offices excluded 20,098 job seekers due to other reasons.





Harmonized unemployment rates (EUROSTAT) was 4.6 % in March 2008.

Czech Inflation April 2008

The Czech Republic's April inflation rate fell less than economists forecast, raising the prospect that the central bank will hold off on cutting interest rates in the near future. The inflation rate dropped to 6.8 percent from 7.1 percent in March and a near decade-high of 7.5 percent in February, the Prague-based statistics office said today. The central bank forercast was for a rate of 6.7 percent. Consumer prices rose 0.4 percent in the month, following a 0.1 percent drop in March.




Housing costs were 0.6 percent higher than in March, led by a 2.9 percent increase in natural gas prices for households. Prices of food increased half a percent from March, following two months of a decline, and were 9.6 percent higher compared with March last year.

The inflation rate has exceeded Ceska Narodni Banka's 4 percent ceiling since last November, driven by global increases in food and fuel costs and government spending measures that are beyond the bank's direct influence.

The Czech central bank said today in a statement posted on its Web site that inflation has passed its peak and its expects price growth to return to ``low levels corresponding to its targets at the end of 2008 and the beginning of 2009.''

However the bank did say the reading exceeded its forecast as a result of higher-than-expected adjusted inflation without fuels which "could signal continuing inflationary pressures from the domestic economy."

The central has relied on the koruna's 12 percent gain against the euro in the past 12 months, slowing economic growth and the mitigating effect of regulated price growth to curb inflation to 2.9 percent in the first quarter and to 2.2 percent in the third quarter of 2009.

The Czech National Bank left its benchmark interest rate unchanged at 3.75 percent for a second consecutive meeting last week continuing to bank on the impact of a strong koruna and a developing economic slowdown to damp inflation.

Czech Imports and Exports March 2008

In March 2008, according to preliminary data, exports and imports at current prices fell by 5.6% and 2.4% year-on-year, respectively. At the same time the trade balance reached a surplus of CZK 8.1 billion in March, CZK 7.4 billion less than March 2007. The balance was unfavourably influenced by a CZK 4.9 billion decrease of surplus in machinery and transport equipment and by a CZK 3.7 billion increase the deficit for mineral fuels, lubricants and related materials.

According to preliminary data, seasonally adjusted exports decreased by 6.2% and imports by 9.0%, month-on-month. The trend component fell by 1.2% in exports and rose by 0.2% in imports.

The March results were influenced by the smaller number of working days (March 2008 had two working days less than March 2007), the presence of the Easter holiday and by the high comparative base of March 2007.

Exports recorded the biggest fall since August 2002 and imports the biggest since May 2005. The last year-on-year decreases were registered in January 2004 (-0.2%) for exports and in July 2005 (-2.0%)for imports. Due to appreciation of the koruna against the euro and even more against the US dollar, external trade grew faster when measured in euros (exports +5.0% and imports +8.5%) and US dollars (exports +23.1%, imports +27.2%) than in korunas.

The Czech currency has strengthened by 12 percent against the euro in the past 12 months and is the world's second best-performing currency against the dollar over the past year.

The trade balance had a surplus of CZK 8.1 billion, which was down CZK 7.4 billion, year-on-year, registering the largest year-on-year fall since April 2003. The trade balance with EU states was positive by CZK 41.1 billion and with non-EU states negative by CZK 33.0 billion.






Trade balance was negatively influenced by the fall of surplus of trade in ‘machinery and transport equipment’ (by CZK 4.9 billion) and by the growth of deficit of trade in ‘mineral fuels, lubricants and related materials’ (by CZK 3.7 billion). Surplus of trade in ‘miscellaneous manufactured articles’ dropped by CZK 0.9 billion and the trade balances of ‘chemicals and related products’, ‘manufactured goods classified chiefly by material’ and ‘beverages and tobacco’ remained on the same level as in March 2007. Trade balance improved in ‘food and live animals’ (deficit down by CZK 1.5 billion) and ‘crude materials, inedible, except fuels’ (surplus up by CZK 0.4 billion).

Total exports of ‘machinery and transports equipment’ fell by 6.0% (CZK 7.2 billion), of which the biggest decreases were recorded in ‘road vehicles’ (CZK 3.9 billion), ‘other transport equipment’ (CZK 1.1 billion) and ‘general industrial machinery and equipment’ (CZK 0.7 billion). Total imports of ‘machinery and transport equipment’ were down by 2.7% (CZK 2.3 billion) and the biggest decreases were registered in the same commodity groups as in exports. The biggest increase in imports was achieved in ‘telecommunications and sound-recording equipment’ (CZK 1.9 billion).

Higher imports of ‘mineral fuels, lubricants and related materials’ by 36.0% (CZK 5.2 billion) were mainly due to higher imports of crude petroleum (+44.7% in value, +6.2% in volume) and natural gas (+47.2% in value, +39.2% in volume).

By group of countries, trade surplus with EU states dropped by CZK 7.3 billion and trade deficit with non-EU states increased by CZK 9.5 billion. Trade surplus grew with France (by CZK 2.6 billion), Romania (by CZK 1.3 billion), Ukraine (by CZK 0.5 billion) and Poland (by CZK 0.4 billion). Trade balance improved with Finland (by CZK 0.4 billion) as deficit turned into a surplus. Trade deficit rose with the Russian Federation (by CZK 3.3 billion), China (by CZK 1.2 billion) and Japan (by CZK 0.8 billion). Trade surplus deteriorated with Kazakhstan (by CZK 0.9 billion), Serbia (by CZK 0.8 billion) and the United States (by CZK 0.6 billion) as surplus turned into a deficit. Trade surplus fell with Austria (by CZK 0.6 billion), Germany (by CZK 0.5 billion) and Slovakia (by CZK 0.1 billion).

In the twelve months to March 2008, compared with the previous twelve months, exports and imports grew by 12.0% and 11.1%, respectively. The trade balance reached a surplus of CZK 81.4 billion, which was an improvement of CZK 27.5 billion.

Favourable development was reported for trade in ‘machinery and transport equipment’ (surplus up by CZK 36.8 billion), ‘crude materials, inedible, except fuels’ (surplus up by CZK 8.6 billion), ‘food and live animals’ (deficit down by CZK 2.8 billion)), ‘animal and vegetable oils, fats and waxes’ (deficit down by CZK 1.2 billion) and ‘beverages and tobacco’ (improvement by CZK 1.2 billion as deficit turned into a surplus). Trade balance deteriorated in ‘chemicals and related products’ (deficit up by CZK 12.2 billion), ‘manufactured goods classified chiefly by material’ (surplus down by CZK 8.0 billion) and ‘miscellaneous manufactured articles‘ (surplus down by CZK 2.3 billion) and ‘mineral fuels, lubricants and related materials’ (deficit up by CZK 0.4 billion).

By group of countries, trade surplus with EU states rose by CZK 65.5 billion and trade deficit with non-EU states increased by CZK 38.0 billion. Deficit decreased in trade with the Russian Federation (by CZK 21.0 billion); and surplus rose in trade with Slovakia (by CZK 15.3 billion), France (by CZK 12.8 billion), the United Kingdom (by CZK 10.3 billion), Italy (by CZK 7.8 billion), Poland (by CZK 7.3 billion) and Germany (by CZK 1.0 billion). Trade balance improved with the Netherlands (by CZK 7.1 billion) and Norway (by CZK 6.7 billion) as deficit turned into a surplus. Trade deficit grew with China (by CZK 48.5 billion), Japan (by CZK 15.8 billion), Thailand (by CZK 7.0 billion), Korea (by CZK 5.4), Ireland (by CZK 5.0 billion) and the United States (by CZK 5.4 billion). Trade surplus fell with Austria (by CZK 8.1 billion) and Hungary (by CZK 6.6 billion).

Czech National Bank Holds Interest Rates

The Czech National Bank left its benchmark interest rate unchanged for a second consecutive meeting today as it banks on the strong koruna and an economic slowdown to damp inflation. The Ceska Narodni Banka seven-member board kept its two-week repurchase rate at 3.75 percent.



The inflation rate, at 7.1 percent in March, has exceeded the central bank's 4 percent ceiling since November. Still, policy makers, who doubled borrowing costs over the past 2 1/2 years, are reluctant to lift rates further as the strong koruna and a global economic slowdown threaten to weigh on local exporters and stifle economic growth more than anticipated.

The Czech currency's strengthening of 12 percent against the euro in the past 12 months may contain inflation by holding down import price growth and weigh on economic growth. The koruna was trading at 25.138 against the euro as of 2:34 p.m. in Prague, compared with 25.207 yesterday.

Rate setters consider the current inflation spike a one-time event, triggered by factors outside of the central bank's reach. They are concerned about the second-round effects of unexpectedly fast price growth, including accelerated pay increases after unemployment slid to an 11-year low.

In its last staff prognosis from February, the central bank predicted the inflation rate to drop to 3.4 percent in the first quarter of 2009 and 2.3 percent between July and September 2009.

The bank's target is 3 percent plus or minus a percentage point. When setting rates, policy makers focus on 12-18 months ahead, when their current decisions should have worked through the economy.

The main Czech lending rate is a still a quarter percentage point lower than the ECB's benchmark rate. Any eventual rate increase could spur additional gains to the koruna, which already is the world's second best-performing currency against the euro and dollar in the past year.

The central bank three months ago forecast the economy will expand 4.1 percent this year and 4.6 percent in 2009, compared with a record growth rate of 6.5 percent last year.

OECD Warn The Czech Republic on the Economic Impact of Ageing

The Czech Republic must cut public spending, boost the retirement age and raise health-care co-payments to preserve economic growth, the Organization for Economic Cooperation and Development said in its most recent country survey out today.

The Czech Republic needs to be more ambitious in setting deficit targets while economic growth is at its current high levels, the OECD said in its 2008 country survey. It advised the Cabinet to support health-care and pension overhauls as the country's ageing population may start straining state resources as early as 2012.

The Civic Democrat-led three-party coalition this year introduced a flat income tax and medical fees and limited some social transfers to keep the public-spending shortfall below the European Union's threshold of 3 percent of gross domestic product. It also has plans to revamp the health-care and retirement system, though these may be jeopardized by the coalition's thin majority in Parliament, the OECD warned.

``To maintain these high growth rates, further reforms are necessary,'' OECD Secretary General Angel Gurria said today at a Prague press conference. ``If policy is not changed, spending will increase considerably'' amid a ``rapid pace of aging.''

The OECD urged Czech authorities to consider a ``full liberalization'' of rents, take steps to dscourage early retirements and reduce the length of parental leave to boost workforce supply (really I am not in agreement at all with this latter point, but I will need to find time for a longer post to explain why). It reiterated that tuition for university students is necessary to extend the number of people with higher education.

``Most important is a need to ensure fiscal sustainability through public-finance reform to put the economy in a better shape to cope with population aging,'' the OECD said. ``The current government made a positive start'' with ``a fiscal package that includes wide-ranging tax and spending reforms, many of which are aimed as first steps in more ambitious reform.''

``The recent global financial turmoil has so far not affected the economy, although weaker growth elsewhere may have some impact,'' it said. ``There is little sign of overheating so far; underlying inflation has remained moderate.''

The government earlier this month approved the outlines of an overhaul of the health-care system that includes allowing health insurers to make a profit. The Health Ministry's plan to sell all but one state-financed health insurer is opposed by two smaller coalition parties, however.

``The impact of the second phase of reform could be significant in strengthening competition on the quality and cost of services,'' the OECD said. ``Putting legislation through parliament is an uphill struggle because the coalition itself has a thin majority'' and ``as a result, many of these further reforms are uncertain.''

Concerning a change of the current pay-as-you-go pension system, the OECD recommends that ``mandatory'' transfer of social security payments to private pension funds be adopted rather than implementing the current proposal that would employees to choose between the two systems.

``Providing a permanent choice risks additional public expense because net contributors are likely to switch while net beneficiaries will stay with the full PAYG pension,'' the organization said.

The Czech Republic has dropped the 2010 entry date as a target for euro-adoption and has not set a new date. The government's strategy is to carry out long-term structural changes and allow the economy to close the distance with the richer euro-sharing nations to try and avoid an outcome whereby letting go of the possibility of an appreciating koruna doesn't trigger additional price growth (a problem that may arise in neighbouring Slovakia if the current entry bid is accepted). This government concern is shared by the OECD.

``A consequence of entering the euro area is that, with the loss of the exchange-rate channel, inflation has to do all the work in nominal convergence,'' the OECD said. However, ``delaying entry implies accumulating opportunity costs because it postpones the gains from adopting the euro.''

Czech Growth Forecast revised Up

The Czech Finance Ministry has said today that it expects the economy to grow faster than originally expected this year as tax cuts and an inflow of funds from the European Union should boost economic activity. The ministry forecast gross domestic product to expand 4.9 percent, compared with a January estimate of 4.7 percent. It left its prediction for 2009 GDP growth at 5.1 percent. The economy grew a record 6.5percent last year.

The Jan. 1 introduction of a flat rate income tax and measures restricting social and health-care expenses should help ofset a growing shortage of workers and the negative effect the fastest inflation in 10 years on household spending, the ministry said. It raised its forecast for the average inflation rate to 6 percent from 5.5 percent in the previous forecast.

``The Czech Republic will remain a dynamically developing economy, attractive for foreign investors'' and ``the positive effects of fiscal reform and inflow of EU funds will be gradually seen,'' the ministry said. ``Reforms underway will reduce limiting factors and contribute to acceleration of economic growth.''

The Czech Republic may receive as much as 26.7 billion euros ($42.4 billion) from the EU in the period of 2007 to 2013.

The koruna is expected to weaken from the current levels to an average 25.8 against the euro this year before it rises to 25.4 a year later, the ministry estimated. The currency was at 25.052 per euro as of 5:52 p.m. in Prague, compared with 25.045 yesterday.

The unemployment rate will fall to 4.2 percent in 2008 and 3.6 percent in 2009, the ministry said, citing the government's measures adopted on Jan. 1, including a cancellation of automatic indexation of social payments that should prompt people to take a job rather than stay on welfare.



``Reform measures in public finances should lead to higher motivation to work by strengthening net earned incomes at the expense of social benefits, contributing thus to labor market recovery,'' the ministry said.

The current-account deficit is anticipated to represent 3 percent of GDP this year as the economy will generate a record full-year trade surplus of 111 billion koruna, according to the authority. The current-account gap will shrink to 2.1 percent of GDP in 2009, the ministry said.

The Czech budget deficit will continue to narrow to 1.5 percent of GDP this year from 1.6 percent in 2008, the ministry reiterated an estimate from April 21.

Czech Retail Sales February 2008

Czech retail sales growth accelerated to the fastest pace in four months in February fuelled by increased wages and an extra working day. Sales jumped 6.3 percent from February 2007, following a revised 4 percent increase in January, the Prague-based Czech Statistical Office. When adjusted for the greater number of work days this year than last, retail sales were up 4.5 percent.



Nominal industrial wages rose an annual 13.1 percent in February as the inflation rate reached a decade-high of 7.5 percen, although the central bank expect higher prices to put a brake on household consumption later this year, at least that is one of the key assumptions of the central bank's forecast for inflation to drop to its 3 percent goal in 2009, even without further interest-rate increases.

Policy makers, who raised the benchmark interest rate by a combined 1.25 percentage points over the past 11 months to 3.75 percent, are mulling whether inflation will recede fast enough, thanks in part to the koruna's 15 percent gain against the euro since July, or whether an additional rate increase is necessary to ward off a second-round pickup of inflation.

"There are the first signs of demand-pull inflation. Should signs of faster, adjusted inflation persist or strengthen, it would justify a monetary-policy tightening.''
Deputy Central Bank Governor Miroslav Singer

Czech Republic Producer Prices

Producer prices dropped back slightly in March, rising at an annual 5.3% versus the 5.6% registered in February. This is now the second month they have fallen on an annual basis, since in February they were down from the 6% high registered in January.



In March 2008, compared to the previous month, prices of agricultural and industrial producers were up by 1.2% and 0.3%, respectively; prices of construction work and market services grew by 0.5% and 1.4%, respectively.

Industrial producer prices rose by 0.3% (+0.1% in February). The growth of the price level was the most markedly influenced by higher prices of ‘coke, refined petroleum products’ (+3.7%), ‘basic metals and fabricated metal products’ and ‘chemicals, chemical products and man-made fibres’ (+0.6% both). The most significant drop of prices came in ‘food products, beverages and tobacco’ (-0.3%) after successive eleven months of growth. Of these the highest decreases were recorded for the prices of ‘dairy products and ice cream’ (-2.0%), ‘meat and meat products’ (-0.4%) and ‘other food products’ (-0.1%). Prices went down markedly in ‘coal and lignite; peat; crude petroleum’ (-1.2%), ‘wood and products of wood and cork’ (-1.0%) and ‘other manufactured goods n.e.c.’ (-0.9%).

Industrial producer prices grew by 5.3% (+5.6% in February). The price level was influenced most significantly by prices of ‘food products, beverages and tobacco’ which rose by 10.8%, of which prices of ‘dairy products and ice cream’ were up by 17.3%, ‘prepared animal feed’ by 35.6% and ‘other food products’ by 8.6%. Prices of ‘coke, refined petroleum products’ increased by 26.5% and prices of ‘electrical energy, gas, steam and water’ by 9.3%. Prices went down y-o-y particularly in ‘transport equipment’ (-4.0%), of which particularly ‘parts and accessories for motor vehicles and their engines’ (-7.2%). Prices of ‘rubber and plastic products’ dropped by 2.3% and prices of ‘wood and products of wood and cork’ by 2.9% (-1.0% in February), of which ‘wood, sawn, planed or impregnated’ by 13.0%.

Export Prices

In February 2008, export prices decreased by 1.0%, import prices by 1.1%, month-on-month. Year-on-year, export prices fell by 5.0% and import prices by 3.3%. The terms of trade figures reached 100,1%, m-o-m, and 98.2%, y-o-y.



Exports: following the slight month on month growth recorder in January, export prices recovered their downward trend in February and dropped by 1.0%, especially due to the strong appreciation of the koruna. The drop of the total m-o-m export price index came mainly from a 0.9% decrease in prices of 'machinery and transport equipment’ (particularly road vehicles) and 'manufactured goods classified chiefly by material’ by 1.6%. Among other sections important in terms of weight, decreases were recorded for ‘chemicals and related products’ by 1.6%, ‘miscellaneous manufactured articles’ by 1.3% and ‘crude materials, inedible, except fuels’ by 1.2%. Price growth was registered only for 'mineral fuels, lubricants and related materials’ by 1.3%.