Czech Republic: Czech economy slows in Q1 as investment spending dries up
June 3, 2016
The Czech Republic’s economy hit the brakes in the first quarter of 2016. The economy slowed from a robust annual expansion of 4.0% in Q4 to a softer 3.0% increase in Q1. The notable deceleration marked the lowest reading in five quarters and illustrates how much the Czech economy benefited in 2015 from a transitory surge in government investment thanks to the absorption of aid from the European Structural and Investment Fund. Such high levels of investment growth have dissipated in the first quarter of 2016, and the slowdown has dragged on overall GDP growth.
Domestic demand slowed to a 2.4% rise in Q1 from a 4.1% expansion in Q4. Although consumption growth picked up steam, it was not enough to offset the stark decline in investment. Private consumption growth increased to 3.1% in Q1 (Q4: +2.9% year-on-year) while government spending accelerated to 2.9% (Q4: 1.8% yoy). Total investment growth suffered from a high base of comparison in Q1 2015, as well as from a decrease in government investment. The fall in government investment dragged on fixed investment growth, which fell from an 8.0% increase in Q4 to a 0.6% increase in Q1. Overall, total investment decreased from 6.3% in Q4 to 1.2% in Q1.
Although Czech exports expanded at a somewhat slower pace, they remained fairly robust as they enjoyed enhanced competitiveness thanks to the artificially weak Czech koruna. The Central Bank has maintained an exchange rate floor of 27.0 CZK per EUR since 2013 in order to boost inflation. This has had the added effect of stimulating the economy through increased exports, which have recorded robust gains since then. However, exports shed some momentum in Q1, growing at the slowest rate in over two years (Q4: +7.3% yoy; Q1: +6.0% yoy). Import growth also slowed, from 7.0% to 5.6% in Q1. As a result, the external sector’s contribution to overall GDP growth was steady at plus 0.6 percentage points, the same reading registered in Q4.
Author: Robert Hill, Economist