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.