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Czech Republic: GDP trapped in mild but lengthy recession, producer prices reflect cheap oil and metals

Czech Republic: GDP trapped in mild but lengthy recession, producer prices reflect cheap oil and metals

16.8.2012 9:15
Autor: David Marek

This time GDP did not deliver any surprise and posted a mild decline as expected. Although the first GDP report lacks details, it is obvious that weak domestic demand is behind. Compared to other countries in the region, performance of the Czech economy is rather disappointing. Continuing recession keeps in play a possibility of further monetary policy easing. Domestic factors are to blame for the mild but lengthy recession. Household consumption remains depressed as real disposal income declines. Government eased its consolidation effort, but it cannot afford provide any significant positive stimulus. Falling construction output suggests weak investment activity. Net exports improved again; however, they did not outweigh negative impact of factors mentioned above. Recession lasts already four quarters. Previous decline in 2008-2009 lasted three quarters and cumulative GDP loss amounted to 5.9%. Current recession is milder; GDP already lost 1.2%, but lasts longer. Moreover, an outlook does not bring a hope for quick and strong reversal. Moreover, debt crisis in the Euro zone remains unresolved and threatens to derail not only countries with Euro coins but the whole global economy, hitting most small open economies like the Czech one. Compared to neighboring countries, the performance of the Czech economy is rather disappointing. In comparison to Q2/2011, GDP rose by 1.0% in Germany, 0.2% in Austria and Slovakia surprised with GDP growing by 2.7%. Only Hungary remains mires in the similar recession as the Czech Republic, its GDP also declined by 1.2% yoy. Continuing recession supports an idea of further monetary policy easing. Interest rates are already very low and some CNB’s board members dissented with the latest rate cut. However, CNB does not have any other tool (FX interventions can hardly support domestic demand). In 2012, GDP is forecasted to a decline by 1.0%.

GDP (Q2): -0.2% qoq; -1.2% yoy
Consensus: -0.2% qoq; -1.2% yoy
Previous (Q1): -0.8% qoq; -0.7% yoy

Producer prices declined again as domestic demand remains weak and key commodity prices in the world dropped recently. Annual inflation in industrial producer prices decreased to its lowest level since April 2010. Prices in construction sector and prices of market services get stuck in deflation. In July, commodity prices played the key role in PPI. Previous drop in crude oil prices led with some delay to lower prices of basic chemical products and fertilizers (-4.8%). Price of iron ore at LME dropped by 5.0% last month, domestic prices of basic metals and metal products declined by 0.3%. Languish demand forces car makers to decrease prices by 0.7%. Core PPI inflation keeps close to 1.0%. Services and construction sector suffer from lack of domestic demand and faces deflation. There is currently only one inflation pressure – prices of agriculture products can start to follow its peers traded on commodity markets in the world. At the end of 2012, PPI inflation is expected to reach 1.0%.

Actual (Jul): -0.3% mom; 1.3% yoy
Consensus: 0.1% mom; 1.7% yoy
Previous (Jun): -0.3% mom; 1.5% yoy

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