Czech economy begins to feel the pinch

Ever since the onset of the global economic crisis, the Czech Republic has been spared some of the stronger side-effects of the financial slowdown, particularly when compared to its western neighbours. However, a new set of economic data suggests that the country’s period of economic upswing is over. Although talk of an actual recession is still rare, the forecast, with job losses, a growing trade deficit and decreased consumer demand, is becoming increasingly gloomy.

October’s four billion crown trade deficit figure reveals the blunt fact that the country is no longer sheltered from the global economic slowdown. The numbers are the worst trade imbalance the country has seen for 14 years, and represents a stark reality check for those who had until recently forecast surpluses as high as more than seven billion crowns. Simply put, the country is now importing more than it exports. With demand, for example, for cars falling Europe-wide, this crucial sector of the Czech economy is being hit the hardest. And with two out of every three Czechs employed in export-oriented companies, and three-quarters of Czech GDP generated by export-related economic activities, the concerns are especially high. I asked economist Tomáš Sedláček to explain:

“This is one of the first signs that we have seen of the worsening export situation, and especially dangerous for us is the lack of demand for our automotive exports. It is a sign that the easy times for our exports are beginning to fade away.”

So why has the Czech Republic, initially shielded from the global economic slowdown, now feeling the pinch? Tomáš Sedláček again:

“This is something that is actually not out of the expectations that we have had. The analysts have always been saying that the Czech Republic has managed and will manage hopefully to avoid the first blow, so to speak – because the world has been hit by two blows. The first blow was the financial or banking crisis and the second is the real economic crisis. The Czech Republic, together with, for example Slovakia and Poland, has been spared the first hit. In fact, these three countries, together with Mexico, are the only OECD governments that did not have to subsidize their banking sectors.”

But now, the good fortune of being shielded from the financial crisis, has paled as surrounding countries, including Germany go into recession:

“We are, however, expecting the second blow, which is a lack of consumer demand and a lack of demand for our exports, which we already see in the numbers and we will be affected by this second blow. Although we do not expect a depression or recession, we do expect a significant slowdown from last year’s six percent GDP growth to around two percent in 2009.”

Photo: European Commission
November saw the Czech Republic shedding 111,000 jobs, with around 90 percent of businesses registering a drop in demand. But will things get worse before they get better? I asked Tomáš Sedláček for his assessment:

“The good news is that we generally have very low unemployment, around 5.4 percent, which cannot be compared to the European seven-ish and the American eight-ish percents. So, we have a low base to start from, but our unemployment is scheduled to go up – it went up slightly this month, and we expect further increases in unemployment in December and January 2009.”