Household consumption boosts Czech GDP beyond expectations

09-12-2003

According to the latest data, the Czech economy grew by 3.4 percent in the third quarter, which exceeded all expectations. The consumption-driven growth, however, is closely linked with a worrying increase in household indebtedness.

The 3.4-percent GDP growth in the third quarter was the fastest since the second quarter of 2001. The main factor behind the development was apparently strong consumer spending, as the GDP figures correspond to a growth in retail sales in the third quarter.

Czech households spent over 7 percent more than a year ago, but that does not mean that Czechs are that much better off in general. On the one hand, the spending boom has been fuelled by fast growth in real wages, which was coupled with virtually non-existent inflation for most of the year. However, another stimulus was record low interest rates, which have sparked a consumer credit boom and enabled many Czechs to live in debt.

The enormous increase in household indebtedness has started causing worries. Many people have probably overestimated their financial situation and are likely to default on their debts. One of the reasons is the expected acceleration of inflation next year due to a series of tax hikes. There is a general consensus among economic analysts that the Czech National Bank should not reduce interest rates any further.

When compared with other countries of central and east Europe, the Czech Republic has beendoing quite well. The Czech economy has surpassed Hungary's, which has been growing at a rate of 2.9 percent. If the acceleration in the Czech Republic continues, some experts believe we can catch up with Poland and Slovakia, both of whom have reported a 3.8-percent growth. One of the facts supporting this estimate is that the economic revival in Europe has not translated yet to the Czech economy, which is strongly export-oriented, and Europe accounts for an absolute majority of Czech exports.

09-12-2003