Prague – Optimists say the economic crisis could go as unexpectedly as it came. Czech industrial production decreased by nearly a fifth between September and November 2008, and Decmeber data will likely show a greater decline still.
No other European country has experienced such a rapid decline.
“When the economy falls so quickly, it’s an indication that the problems came from the outside,” says Lubomír Lízal, an expert at the Czech Academy of Sciences.
Good times taxed
Lízal says the Czech industry was without problems until September. Trouble only started when demand for Czech exports fell.
The Czech Republic relies on exports more than other countries. Export constitutes four-fifths of the country’s economic production.
“Car production is such a significant part of the Czech industry. It’s a branch that ensures faster grown during good times. In times of crisis, it can deepen the problem,” he adds.
During a crisis, people are more likely to postpone buying a car than any other product.
Irresponsible optimists
People working in the industry and bank analysts agree with the academics. “The rapid fall is caused by a combination of factors,” says Oldřich Körner from the Confederation of Industry of the Czech Republic. “We are strongly oriented toward export and the decline in global demand has had the strongest impact.”
The Czech Republic, more over, has used up the advantages that once helped drive up production increase. “Labour here isn’t as cheap as it once was, and in the last 10 years, the investment incentives have been expended,” says Körner.
According to Raiffeisenbank analyst Aleš Michl, the optimism of car makers at the beginning of this year has also contributed to the record decline.
When car makers adjust their rates of production, the decline in industrial production could end as quickly as it started.
Singing praises to the crown
According to Lubomír Lízal, the decline in demand abroad is the only reason why the Czechs are experiencing problems. Otherwise, they are better prepared for the crisis than most European countries.
That’s why even this dramatic industrial decline in the fourth quarter of last year does not signal worse results this year for the entire economy than a GDP growth rate of 2%
European Commission experts are also optimistic, placing the Czech Republic among five countries that will remain prosperous this year.
The Czech Republic, for instance, cannot even be compared to Latvia, whose economy is already declining by 5%. The Latvians have loans in foreign currencies, so that they have enough money for consumption and the purchase of real estate. But when the national currency weakened, they acquired massive debts. As property prices fell, mortgage loans and other assets of local banks lost in value.
By contrast, the Czechs remained faithful to the crown and did not borrow above their means. Property prices grow at a slower rate than in the Baltics. When the crown began its rapid decline against the dollar and the euro in November, there was no threat to banks or household budgets. And it helped at least in part to compensate the losses of exporters.
German anchor
The Czech Republic need not worry about part two of the banking crisis that has been crippling western Europe since the beginning of this year.
German and British entrepreneurs cannot gain any temporary credit because banks are trying to strengthen their own capital. And even if local businessmen are complaining, Czech banks are more accommodating. The level of short-term loans for business had been increasing until September and since then is stagnant.
“Local banks are stable because unlike western financial houses, the don’t loan more than they have at their disposal,” says Lízal.
The proximity to Germany is for the Czech Republic the basis of hope for the future. If its economy recovers from the crisis, the demand for Czech products will automatically increase. “Our GDP growth will always be 2% higher than in Germany,” says Lízal.
If it ends in time
Lízal rejects another catastrophic scenario. According to sceptics, foreign companies are afraid to invest in central and eastern Europe because they consider this region unstable. This doesn’t need to end with the fall of the crown, the złoty or the forint, western companies can also withdraw their investments into local firms.
“The more foreign firms worry about investing in our region, the faster the fall of the crown. And the more advantageous the Czech labour market for foreign firms. French or German firms will want to save on salaries at a time of crisis,” says Lízal, arguing that investors will not lose interest completely.
ČNB governing board member Vladimír Tomšík agrees with this theory. He says the crown can help cushion the impact of the crisis. Experts say the Czechs will be able to cope better with the crisis than the Slovaks, who lost this advantage in January.
Only the uncertainty whether foreign demand will recover in time before the drop in Czech production causes irreversible damage might hamper the Czechs’ good mood.
“Unfortunately, we can’t say how long Czech industrial production will decline and how long these companies will be able to last without resorting to massive lay offs,” said Lízal.
