Analysts: Czech economy to slow in 2009 due to eurozone

Prague, Dec 14 (ČTK) - Developments in western Europe that already got into
recession will have a decisive effect on the Czech economy next year,
economists polled by ČTK said Sunday.

There will be a sharp economic deceleration up to 2 %, according to
them.

Some estimates, however, reckon with a bigger fall or even recession.

Economic problems in the eurozone have already affected the domestic
export-oriented economy: foreign trade in October showed a deficit and
industrial production and building output decreased.

Recession in Europe will last at least in the first half next year and will
even have a greater impact on the Czech economy, said CSOB analyst Petr
Dufek.

Economists say it is not sustainable to keep the state budget deficit for
next year at the proposed Kc38.1bn.

Finance Minister Miroslav Kalousek said on Thursday that the budget gap
could possibly move between Kc50bn and Kc60bn, and Labour and Social
Affairs Minister Petr Necas admitted today it could be Kc70bn.

It will be at the beginning of next year that Kalousek makes public his
plan for cuts in operating expenditures of individual ministries.

Falling inflation is a positive aspect of the current crisis. Inflation is
projected to drop below the inflation target of the Czech National Bank
(CNB) at three %, and in the second half of 2009 to two %.
Falling oil prices and subsiding one-off effects of last year, such as a
steep growth in food prices and reduced VAT rate hike, will be reflected in
the consumer prices.

Falling oil prices will cut costs of businesses and ease the negative
effects of economic development but increase the risk of deflation, said
Patria Finance chief economist David Marek. If it lasts longer, it may have
negative consequences for the economy, he said.

Analysts do not rule out that interest rates of the central bank will fall
to 1.5 % next year.

The Czech currency is unlikely to weaken noticeably in 2009 compared with
the current levels of Kc25-26 per euro. The currency has been volatile this
year. Although swings in the exchange rate can be seen next year due to the
financial crisis, overall, trading in the crown should be much calmer,
economists say.

"The Czech economy will be faring better than the European (economy)," said
Citco-financni trhy's Jiří Simek. That is why he does not foresee any
dramatic weakening of the Czech currency.

The jobless rate, however, will most likely grow in spite of the relatively
good condition of the domestic economy. The growth in unemployment to 5.3
% in November was the first big sign of the global recession,
Raiffeisenbank chief economist Pavel Mertlik said.

So far mainly agency workers have been laid off but also regular staff will
be fired in the months to come, economists said.

The jobless rate may increase to 6 % next year. Trade unions mention
a 7-% growth rate.

Lower demand for cars have forced car makers to cut production and dismiss
13,500 staff by mid-2009 or around a tenth of their workforce.

Experts say that economic downturn will make clients to give preference to
smaller cars, and TPCA which produces such cars plans to hire staff.

Lower car production has an adverse effect on textile and engineering
industries and on transport, for instance.

The global economic crisis has affected primarily businesses in the
manufacturing industry, the least impact seen in public administration and
production and distribution of electricity, according to a poll conducted
by the Economic Chamber among almost 1,900 members.

Almost 90 % of companies have registered a drop in orders and three
out of five firms had to limit production, the poll shows.

Weaker demand for lease contracts and financial intermediation has made
businesses to save money, revise plans and postpone investments.

Banks, on the other hand, are not affected by the global financial crisis,
their profit this year likely to exceed a record Kc47bn seen last year,
central bank vice-governor Miroslav Singer told ČTK.

The slower growth of the Czech economy will weaken demand for loans, which
however will be partly offset by higher interest on loans. Banks are
foreseen to further raise their profits as a result but at a much slower
pace than in the past few years, that is, it will not be a two-digit
growth. Clients' payment discipline will most likely worsen, experts say.

Building construction including housing construction may fall further due
to the crisis. Prices of homes except for prefab houses will not decrease
markedly, though, experts say.

Developers have started to limit speculative construction, that is,
constructing buildings with no knowledge about firms to lease them.

A dramatic cut in interest rates on mortgages that would copy the
development of interest rates set by the central bank is unlikely in the
months to come, said Hypotecni banka CEO Jan Sadil.

Interbank market interest rates no longer correspond to the CNB rates. New
mortgage loans sold with a 5.7 % interest on average in October,
which was close to a long-term record, said Sadil.

It would be a success if mortgage lending next year would be the same as
this year, although the volume of new mortgages has fallen to around
Kc120bn from Kc142bn a year earlier.

Experts say food prices will not go down next year as they will reflect
rising prices of energy and growing wage costs.