The Czech Republic appears likely to slip back into recession. Preliminary estimates show that GDP contracted again in Q3, having only just emerged from recession in Q2 (box in chart below). Besides curbs in public expenditure, investment has been stymied by a spike in political instability after the government collapsed in June due to claims of corruption. Growth has now been negative in year-on-year terms for the past seven quarters. Elections were brought forward last month in an attempt to restore confidence in domestic politics, but proved to be inconclusive. Weeks of difficult coalition negotiations now lie ahead. The Social Democrat party, which took just over 20% of the votes, is expected to commence three-way coalition talks shortly and it is hoped that a breakthrough can be found by the end of the year.
Inflation, measured by the CPI, dropped to 0.9% (y-o-y) in October and was behind the National Bank’s recent decision to intervene in the FX market. Interest rates are effectively zero, meaning that less-conventional monetary methods have been needed to help boost export competitiveness, reduce deflation risks and spur growth. Through aggressive currency auctions, the bank has driven the koruna down to Czk27.0/euro.
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