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Economists: Czech economy likely to stop falling in 2010

( 04 / January / 2010 )

The Czech economy can possibly stop falling this year which, however, does not apply to all branches and at the same time low inflation, rising unemployment and a very modest pay rise may lead to a drop in real incomes for the first time after many years, some economists have said.

Car production, for instance, is going to stabilise, while construction is facing another drop in orders, they said.

Sustainability and strength of expected recovery in Western Europe is the key to all branches in the Czech economy.

The economy will expand only slightly this year, by 1-to-2 percent, with swings likely to be seen during the year, though, analysts polled by CTK said.

The Czech National Bank (CNB) expects economic growth of 1.4 percent this year, the Finance Ministry reckons with 0.3-percent expansion and the European Union foresees a rise of 0.8 percent.

Economists mostly project a fall of 4 percent for last year.

Unemployment will be around 10 percent at end-2010 and the rate may be surpassed during the year, in the first half in particular, according to economists.

Inflation should not be a problem this year in spite of the fact that the price growth will be boosted by the government's austerity package that raises excise duties and VAT.

Retailers say, however, that the VAT hike of one percentage point will increase prices of goods insignificantly in 2010. They say tough competition will make them cut their margins to offset the VAT increase.

The reduced VAT rate, which is applied to food, for instance, increased as of Friday from 9 to 10 percent and the basic rate from 19 to 20 percent.

Industrial production, like the whole economy, should return to growth this year. Most economists project a symbolic growth of around 3 percent.

They expect industrial production to have dropped by more than 12 percent last year.

Domestic firms say that it will take much longer to get out of the crisis than were the original assumptions but still many of them believe the year 2010 will see an improvement in their performance.

Car makers, the driving force of industry, estimate their output at 950,000 cars in 2010, more or less the same amount as last year and in 2008. Demand for cars from the Czech Republic will be affected, like in 2009, by the situation on the main European markets and stimulation measures such as the car-scrapping subsidies.

Construction is also unlikely to seean improvement this year, experts say.

The Association of Building Entrepreneurs (SPS) said that the fall of new construction projects would continue in 2010. This, however, may concern not only building construction but also engineering structures. Housing construction is likely to fall. SPS data show that around 35,000 new homes were built in the Czech Republic in 2009. The figure is projected to fall to around 30,000 homes this year.

As for the price of homes, property experts do not expect further decrease saying prices are to settle at the 2009 level. Prices of homes decreased by up to a fifth last year depending on the location and type of the property.

Stronger economic performance will influence the crown's exchange rate. The currency will be firming to the euro to levels beyond Kc25.00/EUR towards the end of the year, most economists said. Appreciation to the dollar will depend on the situation on global markets.

As for shares, their price growth will be moderate this year, by a tenth on average, according to analysts. Economic recovery in Western Europe and its strength will be of key importance for the Czech stock market.

Czech shares firmed by around 30 percent last year.

Source: CTK

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