Economy shrank in first quarter

Although contraction of 0.7 percent is improvement on estimates, outlook still dim

The outlook for the economy is slightly better than first thought, according to revised figures from the Czech Statistical Office (ČSÚ). Preliminary data showed GDP had fallen 1 percent in the first quarter of 2012, both year on year and compared with the previous quarter.
However, that estimate of May 15 has been changed to reflect newly obtained information from administrative and statistical sources that officially put the contraction at 0.7 percent year on year and 0.8 percent quarter on quarter.
But despite the slight improvement, the Czech Republic is still lagging behind most of its neighbors in terms of growth, with Slovakia posting a 3 percent rise compared with last year. And while exports did increase over the quarter, boosted once more by a strong performance from the manufacturing sector (up 2.7 percent), economists are not surprised by what is being labeled a "shallow recession."
"It has been obvious for quite a long time that net exports fail to offset falls in domestic demand," said Boris Dlouhy from the Confederation of Industry. "This should be taken into account in drafting an economic program to stimulate growth," he added.
Clitics of the government's austerity drive have already expressed concern at a new round of tax hikes and spending cuts, which they say will continue to have an adverse effect on household spending. Martin Prokop, an analyst with Next Finance, said the latest measures won't help the economy.
"The outlook is still not good, because I expect this negative trend to continue in the second and third quarters. Weak domestic demand is the main problem, and raising income tax and value-added tax will only make it worse. The government must find another way of saving money," he said.
Indeed, the slowdown came largely from a decrease in tax revenues, especially from tobacco products, after consumers stocked up on cigarettes late last year ahead of an increase in excise tax on tobacco in January.
The fall in domestic demand has also had a knock-on effect on inflation, with the ČSÚ reporting the rate fell from 3.5 percent in April to 3.2 percent in May. Economists now expect GDP for the full year to decline between 0.2 and 1.2 percent.