Wednesday, February 06, 2008

Czech Republic Foreign Trade December 2007

The Czech Republic posted its first trade deficit in four months in December as demand for Christmas gifts bolstered imports and exporters reduced production during the holiday season. The full-year surplus was however in surplus and the value rose to a record. The deficit of 1.1 billion koruna ($64 million) was the smallest December shortfall ever, and compared with a 11.3 billion-koruna surplus in November and a 3.7 billion-koruna deficit a year ago, the Prague-based statistics office said earlier this week.

The full-year surplus was a record 86.1 billion koruna, and was largely driven by orders for Czech-made vehicles, machines and home equipment from other European Union countries. This has its good side and its bad side, since this EU dependence of course makes the Czech economy vulnerable to any EU wide slowdown like the one we are now entering. The 2007 surplus more than doubled from 39.8 billion koruna a year before, and the koruna rose to a record 25.580 per euro on the news.

Exports in December were up 5.2 percent on the year to 178.3 billion koruna. The value was down some 20 percent from November and the smallest figure last year, seasonally this is not surprising On the whole of 2007 they were up 15 percent on 2006.

The other 26 EU countries bought 14 percent more Czech products in 2007, while local exporters last year shipped 21 percent more goods to neighboring Slovakia.

Imports in December rose at an annual 3.6 percent to 179.4 billion koruna. The whole year goods trade surplus shrank however by 1.9 billion koruna on 2006, largely as a result of rising household spending. Czech imports increased by 13 percent in 2007 when compared with 2006.

So the drop in the trade surplus in December is not surprising given the time of year, but if we look at the year on year rate of increase in both imports and exports (see chart below) we will see that these have been slowing steadily since the summer, and this could be something of a warning signal, especially if conditions deteriorate in the main export destinations.

Bloomberg quote Michal Brozka, an economist at Raiffeisenbank AS in Prague, as saying:

"Besides the strong koruna, Czech exporters will suffer this year from the faltering economies of our main trading partners and from domestic conditions such as higher interest rates and a tightening labor market, which is pushing for higher salaries"

I think this is the main point, especially as the labour market tightens (see my next post) since Czech unemployment is now at its lowest level in more than a decade, causing a dearth of workforce in the economy and threatening to trigger accelerated pay rises.

In addition, due to inflation concerns the central bank is expected to raise its benchmark interest rate to 3.75 percent this week in a fifth increase since May, although it remains to be seen whether in the short term this has the desired effect of cooling the economy, or simply serves to attract more capial inflows and to encourage more Czech citizens to start contracting swiss franc or euro denominated loans as interest rates start to fall elsewhere.

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