Czechs tighten the belt - prosperity pre-crisis not to return

After Hungarians radical reforms, Czechs reduce spending and increase taxes (The Czech lower house of parliament approved a $4 billion package of tax hikes and spending cuts on Friday). Mojmir Hampl, Deputy Governor of Czech Central Bank said it is sign of responsibility. Hampl says that Czech economy will encounter another recession in 2010.

Speaking at the Reuters Central and Eastern Europe Investment Summit in Vienna, Hampl said the Czech recovery would likely have the shape of an asymmetric "W," with a second low point, less deep than the first one, around mid-2010.

Hampl also welcomed a package of tax hikes and spending cuts approved by the Czech parliament on Friday, saying it was a sign of responsibility and a proper response to the country's fast-growing fiscal gap despite a poor growth outlook.

The bank, which has cut 250 basis points off interest rates to aid growth in the last year, left borrowing costs at an all-time low at a meeting last week, but said inflation risks have shifted slightly lower.


The Czech Republic saw gross domestic product fall 5.5 percent year-on-year in the second quarter, but eked out a 0.1 percent rise compared to the previous three months.

"We will see the first positive signs in the first half of 2010, then something like another dip and then the economy will eventually start growing," Hampl said. "This is our baseline."

The recovery would lead to lower growth rates than the up to the nearly 7-percent rises the Czechs had seen in past years.

"My suspicion is that if the economies do return to growth, the potential will be lower than prior to the crisis," he said.

"We will not return to excessive growth this prediction holds at least for the whole European Union. But for our prediction (for the Czech Republic) currently we can't see any good reason why we should see the potential growing as fast as before the crisis."

Economists have cast doubt on future growth rates given the need to tackle high levels of debt in both the public and private sphere and likely tighter lending conditions and controls.