Czech recovery to help keep 'very low' deficit, premier says

Peter Laca

Published: Friday, Oct. 4 2013 9:08 a.m. MDT

Jiri Rusnok, Prime Minister of the Czech Republic, addresses the 68th session of the General Assembly at United Nations headquarters, Friday, Sept. 27, 2013.

Eduardo Munoz, Associated Press

Enlarge photo»

PRAGUE — The Czech Republic will have a "very low" budget deficit this year, within the European Union's limit, as the economy recovers from its longest recession on record, Prime Minister Jiri Rusnok said.

Rusnok's interim cabinet, which will be in power until a new administration is formed after an Oct. 25-26 snap election, proposed a 2014 budget draft that's "slightly expansionary," while it is still committed to keep the shortfall within 3 percent of gross domestic product, Rusnok said Thursday in an interview in his office here. The government's official budget deficit target is 2.9 percent of GDP for 2013.

The government is seeking to reignite growth after rising exports helped end the $196 billion economy's six-quarter recession even as domestic demand remained weak. Following three years of austerity that damped household consumption, opinion polls suggest the next government will be led by opposition Social Democrats, who pledge to increase spending to boost growth.

The budget draft "at least isn't strangling the economy anymore like it did in the past few years," Rusnok said. "There are a number of signs that we at least reached the bottom of economic performance and a number of signals suggesting we could be bouncing off the bottom."

Second-quarter GDP grew 0.6 percent from the previous three months, ending six consecutive quarters of contraction. The HSBC Purchasing Managers' Index signaled growth in manufacturing for a fifth month in September and the economic sentiment indicator rose to the highest in 18 months.

August retail sales dropped 0.3 percent from a year earlier, a smaller decline than the 1.2 percent median estimate in a Bloomberg survey of 12 economists, and rose 1.3 percent when adjusted for working-days difference, the Statistics Office said today.

"The situation is still fragile, in all of Europe, and we need to wait for coming quarters to see how much of the optimistic signals from forward-looking indicators are actually confirmed," said Rusnok, who was appointed premier in June after the government of Petr Necas collapsed following a scandal over illegal spying.

Necas, during his three-year rule, credited deficit reduction with helping boost government bonds to record highs. The yield on the Czech government's 10-year koruna bond has risen since reaching an all-time low of 1.48 percent in May, along with a pullback from emerging-market assets. It dropped 3 basis points, or 0.03 percentage points, to 2.25 percent today.

Czech borrowing costs have increased less than those of neighboring Poland, the EU's largest eastern economy, and are holding below comparable U.S. Treasuries, according to data compiled by Bloomberg.

"The Czech economy as such isn't in a bad condition," Rusnok said. "The economy isn't suffering from any major macro- economic imbalances that are visible in some other European countries."

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