Monday, March 23, 2009

Czech Industrial Output Drops By 23.3% In January

Czech industrial output fell the most in at least 16 years in January, the fourth successive month of contraction. Output was down 23.3 percent following a revised 12.8 percent slump in December. The drop was the highest since Czech Reublic came into existance in January 1993.



The slowdown in the euro region, which is the main market for Czech goods, is really hurting exports, and both the central bank and the Finance Ministry are cutting their 2009 forecasts. Central bank Governor Zdenek Tuma estimates that the economy may contract by as much as 2 percent this year. Others put the size of the contraction much higher:

“The slump of industrial output confirms fears that the economy may contract 3 percent to 4 percent this year,” said Vojtech Benda, senior economist at ING Wholesale Banking in Prague, in a note to clients. “For the central bank, it presents quite a clear argument for another lowering of interest rates, which could be outlined after the Thursday meeting.”


The central bank, which has cut the benchmark repurchase rate to 1.75 percent, meets again this week Most analysts feel they will keep rates unchanged, but as we see above Vojtech Benda is not so sure, and looking at today's data I am inclined to agree with him.

Strong Contraction In Eastern Europe Forecast

According to a study out today by Capital Economics East Europe’s gross domestic product will shrink 6 percent on average this year, with every single economy in the region posting a contraction.

The biggest decline (15 percent) will be in the Baltics. Poland is forecast to contract by 3 percent. The polish decline will be lead by a drop in industrial output that will help push the unemployment rate to close to 15 percent. Falling tax receipts will widen the fiscal gap to 5 percent of GDP, making the goal of euro adoption in 2012 unlikely.

Hungary and Romania, which is negotiating external aid, will both shrink by 7.5 percent. Turkey will also shrink 7.5 percent, while Ukraine’s and Estonia’s output will decline by 10 percent. Bulgaria, expected to shrink 5 percent this year, is likely to follow its neighbor Romania in applying for an IMF loan as a collapse of exports and inward investment will shrink the money supply, forcing the government to drain its fiscal reserves to restore liquidity. Capital Economics argue Bulgaria's reserves will only cover their needs for a further six to 12 months.


Update Czech Central Bank Leaves Interest Rates Unchanged

The Czech central bank left its benchmark interest rate unchanged on concern that a reduction would further weaken the koruna and spark inflation. The Prague-based Ceska Narodni Banka kept the two-week repurchase rate at 1.75 percent. So concerns about the Koruna have won out over growth in the short term.

17 comments:

Anonymous said...

Rubish
" The biggest decline (15 percent) will be in the Baltics. Poland is forecast to contract by 3 percent. The polish decline will be lead by a drop in industrial output that will help push the unemployment rate to close to 15 percent. Falling tax receipts will widen the fiscal gap to 5 percent of GDP, making the goal of euro adoption in 2012 unlikely."

Please start to use simple math.
5% from 1.3 trillion PLN economy is 65bilion. How do you know that gap will be this size when government is trying to keep 18 billion. I understand that it will be tough. But according the data you are printing it means that budget will be overshoot 3,5 times.

Edward Hugh said...

Hello Anonymous,

"Rubish"

Well maybe. I would point out first, that as was clear from the article, these are the views of capital economics, not mine. The only real view of my own here is a forecast on the Czech economy for GDP contraction of between 4% and 5% of GDP for this year.

"How do you know that gap will be this size when government is trying to keep 18 billion."

Well, I don't, since the study wasn't mine. But both Neal Shearing and Roger Bootle are pretty good economists, and Neal in particular has a good record - much better than most of the local analysts in the East I am sorry to say, and I assume they did their sums.

As I say I haven't gone through the Polish data yet, but from what I can see the 3% contraction looks pretty near the mark to me, even with downside risk in H2 for the impact of all those failed zloty options, and then when we consider that the Polish budget is based on a government full-year growth forecast of a positive 3.7 percent expansion for 2009, you can see there is going to be one hell of a shortfall, whether it will be 65 billion I couldn't swear, but it will certainly be more than 18 billion (and a lot more).

And I gues the Polish government will need to start cutting heading into the contraction (pro cyclical spending) which means we could see a 4% to 5% GDP contraction as a result.

Basically, if I can say something here, I do wish people in the East would stop being so dogmatic when we are dealing with data, as it is all pretty testable, and most of what has been being said so dogmatically in recent months, is already so far off the mark it looks ridiculous.

So I would suggest, and in your own best interests in the current climate, that people just get a bit nearere the mark with their forecasts and estimates. Mine haven't be so bad, just look round the blogs. So if I can get it more or less right, anyone can.

I think far too often people are allowing their emotions to cloud their judgement, and that is never a good policy.

Anonymous said...

Hello Mr Hugh,

Let me point out few things:
1. Everyone has right to have opinion, even if it is bad one.
If someone decide to share the opinion it would be nice to say what facts stands behind this conclusion. Words are cheap. Too many cheap words done real damage. The biggest one was done by influential "gurus" because too many people took their words in very dogmatic way.

2. Your prediction about Czech Economy for 4% to 5% are possible, even for Poland it is possible nobody really knows (even you) what numbers it will be at the end. The point is that doing most of the analysts doing their predictions without any analysis. Again words are cheap and none will chase them for doing wrong one. Everyone has right to be wrong. They are creating trends and many people read what they say. Power of rating agencies is the best example how it works.

3. "
Well, I don't, since the study wasn't mine. But both Neal Shearing and Roger Bootle are pretty good economists"

What does it mean good economist? Do you have any definition what does it mean? Greenspan, Geithner, Bernanke are they good? How did we get to the situation like this under top class economists.
Every single housewife (maybe despite american one) knows that if they will spend more than they earn, it will lead to direct troubles. Top class guys don't know it?

4. "Neal in particular has a good record - much better than most of the local analysts in the East"

How they got their data. What power they have than their data is better than local statistical office?

5. "Polish budget is based on a government full-year growth forecast of a positive 3.7 percent expansion for 2009"

According I had read this was done base on 1.7% growth.

6. "I do wish people in the East would stop being so dogmatic when we are dealing with data, as it is all pretty testable"

First of all, being so dogmatic about which data? For me it seems that everyone has it's own. What is testable? Where I can find information that losses in the financial sector are x and will not be more. How you can produce any reasonable model and test it if you do not know basic values in the equation?

7. Emotions :-). I admit, it is difficult to have cool head when you see that term "Quantitative Easing" is used instead of "Printing money" (another sociological trick) and it is regarded as the cure for the troubles. For me the best analogy is "boloon is broken, guys put finger to the hole, and start to pump it again".

8. I am reading your blog pretty often. Sometimes I agree, sometimes not. This time I decided to rise my voice.

Edward Hugh said...

Hi,

"Sometimes I agree, sometimes not. This time I decided to rise my voice."

Well fine. This is good. No one has a monopoly on truth.

"Your prediction about Czech Economy for 4% to 5% are possible, even for Poland it is possible nobody really knows (even you) what numbers it will be at the end."

Well I am just going by the data, and what I am seeing, and how all the economies are going well beyond the forecasts on the downside at the moment. This will stop at some point, but in my opinion (and it is an opinion and not a fact) we aren't there yet. I think H2 will be more difficult than H1, and especially in the East.

"Again words are cheap and none will chase them for doing wrong one."

Well this works on both side doesn't it, there are those who talk economies up, and those who talk them down.

"How they got their data. What power they have than their data is better than local statistical office? "

Well, just a detail, but the local statistical offices are not the best source of data, Eurostat is much better, because it applies standards (same to everyone), and the data is comparable immediately.

But beyon this, statistical offices report, analysts analyse, and governments hype.

I don't think you can blame analysts for doing their job, or just accept those you agree with. We live in a pluralist society, and diversity (of opinions) is positive.

Basically people make or break their reputations.

"What does it mean good economist?"

Well this is subjective isn't it. I know my own views, and I am happy to stand by them, but then if I look at the list of nobels there are a lot of names there that I wouldn't have included.

"According I had read this was done base on 1.7% growth. "

Well, I am disadvantaged, since I can't read Polish. The number I quote come from Bloomberg, and it might be wrong. Obviously I am now watching like a hawk for this data point.

The thing is this discussion started with a question about whether the Polish deficit would reach 5% of GDP this year.

Basically the EU Commission (January forecast) are forecasting 3.5% (they don't accept the Polish government interpretation), and they were forecasting 2% growth at that point.

My experience with EU forecasts at the moment is that they are overoptimistic, and given that even if the Polish budget is based on 1.7% growth, they are not going to see anything like this, so I don't find 5% deficit as is so outrageous.

Of course, the government will probably respond by spending cuts. We will see. We don't even know at this point whether we will see the IMF in Poland. In principle we won't, but as we are seeing, things at the moment have a habit of changing fast.

Blue Monk said...

If I recall correctly, Polish budget was planned with GDP growth of 3.7%. They are prepared for slower growth of 1.7% in which case they will cut spending with 18bn in H2.
That was sometime in February. Since then I've read statement by the deputy FM that budget deficit will be kept below 3% by all means. Few days later the same deputy FM stated that tax increases are excluded, there is no more room for additional spending cuts, so if the growth is below their prediction, deficit will be over 3%. At the same time, the goverment is commited to introduce euro asap. It is hard to predict, but being negative nowadays seems to pay off :)

Edward Hugh said...

Thanks Blue Monk, that was helpful.

"It is hard to predict, but being negative nowadays seems to pay off :)"

Well definitely. At the moment "downside risk" is so structurally inbuilt that you can virtually do forecasting off the top of your head by taking the official forecast and giving it a couple of percentage points downwrad "haircut". Then you are almost bound to come out getting it right, always adding, of course, that there is even more downside risk.

Upside risk won't be with us for some time yet, I think this is the only thing we can say with any degree of security. :).

Basically, the German contraction is now feeding off Russia, Romania, Hungary, the Czech Republic and Poland, while the contraction in Russia, Romania, Hungary, the Czech Republic and Poland is feeding off Germany. So we are caught, like in the old Stalingrad days, in a vicious circle, and we don't seem to have the Panzer divisions to break out.

Anonymous said...

"and we don't seem to have the Panzer divisions to break out"

Chinese government starts to be anxious about their dollar reserves. It is little bit more than "panzer division". It is not clear on which site of the line their potential action will be made, however results can be devastating for those on the wrong one and high sacrifices for this "panzer division" itself.

Edward Hugh said...

Hi,

"Chinese government starts to be anxious about their dollar reserves."

Well fine. But in my humble opinion people in Eastern Europe would be well advised to stop worrying for the moment on what is going on in China and the US, and to focus on the regions own problems, which so many people seem set on denying.

The Czech president seems to have done everyone a load of good today, at least moral wise (I don't think).

Also, with very rapid contractions being fed by earlier widespread use of the flat tax, and political systems which are all wobbling under the weight, there is plenty to be concerned about.

Basically, people need to focus on the interconnections between eats and western europe, especially banking and trade, and how to revive the growth dynamic. In this case the panzers in question (the ones that are currently encircled) are most definitely German ones, and if they don't find a way to break out the region could be facing years mired in deflation, defaults and political instability.

And all the worrying about whether China will buy US assets won't get us out of this one.

Anonymous said...

1."Well fine. But in my humble opinion people in Eastern Europe would be well advised to stop worrying for the moment on what is going on in China and the US, and to focus on the regions own problems, which so many people seem set on denying."

In my humble opinion you are wrong.

There is no reason to worry. Maybe it sounds strange, it is glimmer of hope. Let me explain the logic behind. If China will start to diversify some of their reserves there is significant probability that dollar will go down. If dollar will slide, prices of the crude oil will go up. It will significantly improve situation in Russia. Russia is key of the improvement in our region, not US, not EU. Why? Because Euro will still remain too strong to support the export from eurozone, and it opens clear chances to the countries which currencies lost in values with the relation to the euro. We are closer to the source and still more competitive. It could be the core of the light in the tunnel for central Europe states like Poland, Czech Republic, Hungary and Ukraine. Not adopting the euro is a huge advantage. I don't need to remind you that Russia has 150 millions people almost twice as Germany and huge needs for infrastructure improvement. It is key importance to our region. Possible projects there can ignite spending and demand and it is very likely that some chunk of that will land on our table. It would work as shock absorber for export loses on the EU market.

Can you say that it is impossible scenario?

2. "The Czech president seems to have done everyone a load of good today, at least moral wise (I don't think)."

You probably mean Czech Prime Minister Mr Topolanek. Czech President is Vaclav Klaus and it was not his 5 minutes this time.

Well, western democracies doesn't like if someone speak his mind directly. From the diplomatic stand point Mr Topolanek should look what he is saying (he represents EU). His style is not surprising me at all. I am Polish but I am living in Prague and I am watching political and economical situation in the region (including Slovakia) on daily basis and in their native languages. I have small advantage over you to be at the source. (By the way Eurostat rely on the data from national sources). The most striking point to me is that it wasn't important what he said, important was how he said the message. I can't believe it. This guy is 100% correct. Whole Obama's (Geithner) plan is one big rubish based on wishful thinking and direct road to hell for their citizens. Maybe you don't like Czech's prime minister he is too direct sometimes even for my taste. But he is saying the truth. The real value was that his finance minister Mr Kalousek had very similar policy like our Mr Rostowski and they have my trust. Unfortunately Mr Kalousek has to step down as the whole government. Bad luck.

Best regards,

Edward Hugh said...

Hello Anonymous,

First off, thanks for putting me straight about Topolanek. Basically I get confused by politics, since I don't take it very seriously, and don't think it has too much to do with the technical areas of economics that interest me.

Of course, at a time when we all need to work together, creating tensions doesn't seem to me to be very helpful.

Also drawing attention to yourself when your country is about to need a lot of external help doesn't seem to be a good policy either. This reminds me of some of the things the Russian leaders were saying back in August. They are much quieter now I notice.

Of course I don't agree with the assesment of Obama, especially not when I am arguing that the ECB basically needs to get into qualitative easing and start printing money for the fiscal side. But I am not going to start discussing the US bailout on a blog about the CR economy.

As I suspected, our difference of perspective is about rather more than whether the Polish deficit will rise to 5% of GDP or not.

On that topic, we will see. On all the rest I don't know what to say which would make any difference. You seem pretty confirmed in your own opinions. Is it the sun which goes round the earth, or the earth which goes round the sun?

And what would count as evidence to convince you of anything one way or another. Certainly not the size of the Polish deficit, or of the Czexh contraction.

A default on Russian sovereign in 2010 perhaps, after all Deputy Prime Minister Sergei Ivanov said yesterday that Russia needs to be "cautious" and save one fifth of the reserves for 2010, just in case. Which implies that by December they think they may have gone through four fifths. If Obama's plan doesn't work, then there is no hope oil prices rise.

Here we go.

Blue Monk said...

I'm not following czech politics on daily basis, but to me it seems that fall of Topolanek goverment WAS Klaus' five minutes, at least he is happy now. Now we have increasing political risks, greater chances for some "exotic" crisis management options.

Edward Hugh said...

Hi Blue Monk,

"Now we have increasing political risks, greater chances for some "exotic" crisis management options."

Definitely. If we think about all this, the causal chain goes like this:

Financial Crisis -> Real Economy Crisis -> Political Crisis

Of course, then you need to build in all the circular,self reinforcing, feedback arrows.

What is amazing about Eastern Europe is how quickly we have gone from one end of the chain to the other. Every time someone out Easts says "we have developed new tools to deal with this" I get a shiver down my spine.

Incidentally, and on the previous topic, while I would rather discuss the future of the Chinese economy on my China blog, I think it is quite impossible for the yuan to rise vis a vis the dollar.

The Chinese are, it seems to me, only threatening "diversification" to try to get the US administration to turn a blind eye to yuan devaluation (which of course is politically totally impossible for Obama).

The Chinese economy is TOTALLY dependent on exports, so they have a problem, if the US don't buy, who the customers are going to be, and don't tell me (please) the Europeans and the Japanese, since their economies are only progressively worse than the US (in the above mentioned order). Going through the Japan trade data yesterday, February imports from China were horrorific. A complete disaster for the Chinese.

Anonymous said...

Diversification of the Chineese reserves does not mean automatic strenghtening of the yuan. Exchanging dollars for commodities is maybe the only option. They will need them anyway.

We will see what the future will bring.

Best regards,

Hynek Filip said...

As a Czech living in Prague, I find it sometimes difficult to comment on posts in the Czech watch. It is quite tough to remain objective, if you are part of the economy concerned.

However, I would like to make a few points here:

The "crisis" or whatever it is, has not started either in Warsaw or in Prague. The whole thing has been simply imported. It is, therefore, very important for us to know what is going to be sent our way next.

The options do not look that good: printing money, massive debts, economic slump, mass unemployment, woe and misery of all kind. That is why everyone, and business people in the first place, should watch very closely what is unfolding in the West and the far East. It will not be that nice, we will not do anything about it, so we should better be prepared.

If we are not prepared, we will end up like the Mayor of Limerick, complaining desperately that Michael Dell or some other tycoon has "no dedication" (lol) to our country and will simply leave to make his widgets elsewhere...

Anonymous makes another important point. We should keep in mind that the various gdp growth estimates we are flooded with on a daily basis are no more than a piece of rubbish. Utterly unreliable, changed every other month, worth much less than the paper on which they are printed. Read gdp forecasts from a year ago and you will be surely most surprised.

From my point of view, we should go back to the basics and rely only upon the fundamental, hard and current data.

For example: last month government tax receipts. Last month loan creation. Last month classified loan data. Last month employment statistics. Last month trade balance. Last month bankruptcies, last month car sales and car production. In every half civilised economy, plenty of such information is readily available. That is the kind of information we should be working with, and are regrettably not.

Just for example - the January industrial output data are oh so hopelessly obsolete. With a little exaggeration, the Czech industry, from steelmakers down to the fifteen thousand employees of Bosch, is just one big car factory. In January, the factory was not doing very well. But it is early April now, we have imported the German Umweltpraemie and the March results may actually end up y-o-y positive.

But surely, if the IMF/EU/green-men-from-outer-space decide that we are very poor indeed and that we should really get some support, why not. We can spend euros as well as anybody.

Edward Hugh said...

Thanks for an interesting comment Hynek,

"As a Czech living in Prague, I find it sometimes difficult to comment on posts in the Czech watch. It is quite tough to remain objective"

Well, you can imagine how I feel commenting on Spain then :)

"With a little exaggeration, the Czech industry, from steelmakers down to the fifteen thousand employees of Bosch, is just one big car factory."

Well you need to follow German unemployment and consumer confidence readings as leading indicators for your economy then. Unfortunately, these have both being going in the wrong direction recently. But then, I think most people have already rwitten off 2009, and it is 2010 that we are really interested in now.

An open question at this point.

Hynek Filip said...

As I say, I do not really believe in "soft" data, such as various PMI indicators, consumer confidence indexes and that sort of thing.

Unemployment is a bit better, although has its flaws as well.

I have read through the last Eurostat unemployment report, published yesterday. Fascinating reading, I must say. One can easily see that there is no East, no West, but the "central" EU (Germany, France, Holland, Denmark, Austria, the Czech Republic, Slovenia, Luxembourg) where the rates are not that bad, certainly not critical, and not going up fast.

Then, there is the geographical "periphery", such as Ireland, Spain and the Baltics, where the numbers are already high and going up at the speed of light. Obviously, there are exceptions, but these two groups stand out quite clearly.

Speaking about indicators, we have an interesting indicator in the form of registered truck movements. Since 07, trucks have to pay a highway fee of some EUR 0.2 per kilometer. The state publishes the total amounts of fees monthly. The March data show a 10% y/y fall, however the drops in both January as well as February exceeded 20%.

Interestingly enough, March 09 fees equal those of March 07, so I would say that we are having a significant correction, but hardly a crisis. Certainly not a freefall or a tailspin.

Btw Anfac data of yesterday re Spanish car sales are not that bad either, Spain is in trouble but still alive. I thought that the sales would stabilise at about 60000 units, yet you are closer to 80000 and going up.

Edward Hugh said...

Hi Hynek,

"As I say, I do not really believe in "soft" data, such as various PMI indicators, consumer confidence indexes and that sort of thing. "

Well OK, but be very careful. It depends what you want the data for. If you want to make growth theory type correlations to understand how economies work, then obviously you need "harder" data, and longer time series.

But if you want to follow the crisis "live" (as I do) and make short term business decisions (as perhaps you do), then this data is, IMHO, vital.

The correlation between PMIs and GDP is remarkable, for such soft data (but this should not surprise us, since the labour force "survey" data gives a much better picture than the labour office signings data). In fact, I really value "qualitative" data in general (as a complement for interpreting quantitative, not an alterantive), and argue we need more of it. Economists should learn from anthropologists, not look down on them.

Basically consumer confidence normally gives a reasonably good picture of consumption patterns on a six months forward horizon. The problem is calibrating the data, since now we are on very low levels generally, and small changes (up or down) are hard to interpret.

My feeling is that the German labour market is now, slowly but surely weakening, and when they drop (and unemployment seriously starts to rise) we will all see another turn of the screw in Europe.