Czech Republic: Czech economy slows in Q2 dragged down by fixed investment contraction
September 2, 2016
The Czech Republic’s economy lost some steam in the second quarter of 2016, slowing from a 3.0% annual increase in Q1 to a 2.6% expansion. The reading was the lowest in two years and highlights the magnitude of the impact on investment of the diminished absorption of aid from the European Structural and Investment Fund. The high levels of investment growth made possible in 2015 thanks to the EU funds started to dissipate in the first quarter of 2016 and have further declined in Q2, dragging on overall GDP growth. Weaker private consumption and to a lesser extent public spending also held back growth, while the external sector performed strongly.
Domestic demand swung to a 0.4% fall in Q2 from a 2.5% expansion in Q1, dragged down by the sharp decline in total investment as well as by a weaker expansion in private consumption. Private consumption growth decelerated to a 2.2% increase in Q2 (Q1: +3.1% year-on-year) and growth in government spending inched down to 2.5% (Q1: +2.6% yoy). Total investment growth suffered from a high base of comparison in Q2 2015, as well as from a decrease in investment in buildings and structures. Overall, total investment swung from 2.1% growth in Q1 to a 4.5% decline in Q2. Fixed investment deteriorated, plummeting from a 2.6% increase in Q1 to a 4.4% fall in Q2, which marked the steepest contraction in four years.
Although Czech exports expanded at a somewhat slower pace, they remained robust, as they continued to benefit from an artificially weak Czech koruna. The Central Bank has maintained an exchange rate floor of 27.0 CZK per EUR since 2013 in order to stimulate inflation. This has had the side effect of boosting exports and, consequently, the economy. However, exports lost some momentum in Q2, growing at the slowest rate since Q4 2013 (Q1: +5.9% yoy; Q2: +5.7% yoy). Import growth slowed more sharply, from 5.5% to 3.1% in Q2. As a result, the external sector’s contribution to overall GDP growth rose from 0.6 percentage points in Q1 to an almost-five-year high of 2.3 percentage points in Q2.