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Czech Q4 GDP grows 6.9%, far above forecast - extended

The Czech economy grew by 6.9% in the Q4 last year compared with the same period of 2006, wrong footing predictions of an impeding slowdown in the central European economy.

The Czech economy picked up speed at the end of 2007, confounding expectations of a slowdown, but fiscal tightening and weaker euro zone growth are expected to take their toll this year. GDP jumped by 6.9% year-on-year in the final quarter on a broad-based rise in spending, investment and trade, the Czech Statistical Bureau said in Friday’s flash estimate. Economists polled by Reuters had expected growth to slip to 5.6%. Full-year 2007 growth reached a record 6.6%. The Czech Q4 expansion lagged behind the exceptional 14.1% reported in neighboring Slovakia, but was well ahead of Hungary which had a mere 0.8% rise. The figure propelled the crown currency to fresh all-time highs against the euro and further dampened chances of interest rate cuts this year.

“This is of course very good news, but I expect that it is the peak of the current potential,” Finance Minister Miroslav Kalousek told Reuters. “In the coming years I expect quite decent economic growth, but anyway I do not predict so high numbers,” he said. The statistical office gave no breakdown of the overall figure but said health spending ahead of a January hike in health care and medicine fees helped to boost the headline figure by 0.5 percentage points. Detailed figures are due on March 7. The fourth quarter GDP figure was an increase from a 6.4% rise in the Q3 , revised up from 6.0%. “It is positive information in light of the fact that the euro zone slowed down, (and) the German economy did not grow that fast at the end of the year,” said David Marek, chief analyst at Patria Finance. “It is unambiguously another indication that the CNB (central bank) may have been too quick with the scenario of interest rates, when it predicted that they could start decreasing. Reversely, now the market can start speculating that another rate hike may be necessary.” Other analysts said that an expected inflation drop next year may lead the bank to keep rates flat throughout 2008.

Policy dilemma
The central bank raised the main repo rate by 25 basis points to 3.75% last week, extending a tightening drive started in 2005. But its new quarterly inflation forecast indicated that rates may have peaked and may start falling already in late 2008 as the economy cools and one-off inflation shocks abate. Despite the strong GDP reading, there were some signs of a slowdown toward the year-end. December industrial output lagged expectations and December retail sales, released on Friday, showed a lower-than-forecast 5.4% rise. This year, government welfare cuts and tax reforms will kick in, capping private spending. The central bank forecast showed that the bank expected the fiscal reforms to narrow the public sector fiscal deficit to 1.5% of GDP this year from 1.9% last year, contributing to tighter policy. The crown currency firmed to a new all-time high of 25.075 to the euro after the data from 25.100 earlier, but later fell back to 25.23. The currency has gained 11% over the past year, driven by strong exports, regional sentiment and a narrowing negative interest rate differential versus the euro zone. (Reuters)