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Analysts: Czech GDP to drop

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According to JPMorgan, the Czech economy can expect a 1% drop.

The Czech Republic should watch out. Economy development prognoses for next year are getting worse. Despite the majority of current forecasts expecting a growth of 2-3%, a shock might come instead. The renowned JPMorgan Chase bank is seriously counting on recession.

JPMorgan, in its latest prognosis, expects the Czech GDP to drop by 1% next year. If this proves to be right, next year will be the blackest of all in the history of independent Czech Republic. It has experienced an economic drop only twice. In 1997 by 0.7% and one year later by 0.8%.

The impact would be crushing. State budget would lose CZK 70 billion, compared to the current cabinet’s expectations, and the unemployment would rise above 8%.

Other analysts approach this catastrophic prognosis with caution. “In our pessimistic scenario for next year, we expect a 1% growth. Nevertheless, the future development is covered by mist and so even a different number is not completely out of question,” said David Marek from Patria Finance.

The risk of the Czech Republic “importing the recession” from the Eurozone is growing. This currency zone has already fallen into recession and since more than 50% of Czech export heads into EU, domestic companies are starting to experience difficulties. Industry and construction are losing commissions, there are frequent shutdowns, and companies are starting to cut down the costs. Including laying off staff. The biggest European producer of bent furniture TON announced it would lay off 170 people.

Loans are going to play a key role in the economic development. They are hard to get for companies at the moment. “We expect them to get easier during the second quarter of next year at the latest. Otherwise, we can’t rule out ensuing economic stagnation,” said Pavel Mertlík from Raiffeisenbank.

Sharp slowdown of the growth or the threat of recession would significantly lower state profits. “The government does not underestimate the situation. We have a backup plan ready in case the GDP falls under 2%,” Finance Minister Miroslav Kalousek told Hospodářské noviny.

According to Kalousek, the government’s ready to deal with a budget fallout of CZK 10-15 billion by “freezing” some expenses. “If the fallout is greater, I must admit it would then result in a higher deficit in public finances,” Kalousek said. Generally, a 1% slowdown of economic growth takes CZK 13 billion.

Translated with permission by the Prague Daily Monitor.

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