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ČR on verge of a recession

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The catastrophic drop in industrial output, the drastic decrease in exports, the rising unemployment rate, the fall of the crown. There seems to be no end to all the bad economic news. And still more analysts are saying the forbidden word out loud “recession”.

“A recession is becoming more and more probable. In the first half of this year, there will likely be an economic decline,” says Pavel Sobíšek, an analyst with UniCredit Bank. And he is not alone. “The probability of a recession is higher than 50%,” says David Marek, the chief economist with Patria Finance. He says the gross domestic product will fall this year by 0.1%.

All of the eurozone, headed by Germany – the Czech Republic’s most important trading partner – is already in the midst of a recession. So is Great Britain, and, among the smaller countries, Denmark and Hungary.

The Czechs are slowly starting to admit that they are not living on an island of stability that could withstand the global economic storm. “We can’t rule out a scenario, where the GDP growth would be close to stagnation,” says Eva Zamrazilová, a member of the Czech National Bank council.

According to Jaroslav Míl, president the Czech Confederation of Industry, the Czech Republic will need to undergo a crisis. “There aren’t any miracle solutions that could immediately save the economy,” says Míl. Industrial output fell in November by 17.4%, which is one of the biggest declines in Europe. The crisis has so far had the biggest impact on the automobile industry. Other branches, such as the producers of plastics, are also reporting problems. And other sectors of the economy, such as glass producers, are also feeling the impact of the crisis.

On the other side of the barricades, the unions are complaining. “I see this year in a tragic light. According to our information, the situation will be the worst in the middle of this year,” says Josef Středula, the head of the KOVO union. The situation on the labour market is already looking bad. The unemployment rate is 1% higher and the number of registered unemployed people grew to 50,000. Big companies, including Škoda Auto, have not, for the most part, started laying off people. Instead, they are offering their employees a four-hour work week.

People who have lost their jobs don’t have much money to spare, and even those who do have work are spending less than last year. Retailers are already feeling the 3% decline in sales, and these are only statistics from last October.

Experts are unable to agree on the possible length and depth of the economic recession in the Czech Republic. For example, David Navrátil, the chief economist at Česká spořitelna puts the probability of a recession at just 30% and believes the economy will grow by 1.3%. Finance Minister Miroslav Kalousek has thus far always ruled out the possibility of a recession. Similarly, he ruled out direct aid to companies experiencing problems. But at the beginning of last week, he expressed willingess to support the collapsing glass manufacturing plants Crystalex and Kavalier.

Analysts nevertheless doubt that state aid could significanly help the economy. “In order for fiscal stimuli to have some effect, it would need to reach tens of billions of crowns,” says David Marek.

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