As recovery takes hold, Czech companies' optimism builds

Sun Jun 8, 2014 7:08am EDT

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By Jason Hovet

PRAGUE, June 8 (Reuters) - Czech companies are growing more confident and slowly starting to look at new investment as a succession of strong data shows the beaten-down economy is beginning to spring back.

A year after the central European country climbed out of a record-long recession, Czech consumers are regaining confidence and some firms are planning to increase production and take on new workers.

State agency CzechInvest said this week it had already received 100 applications for investment aid this year, the most since 2008 and more than the 2013 total of 98 applicants.

Manufacturing is now growing, spurred by double-digit growth in exports to Germany and other western markets. Consumers also have less to worry about as a new centre-left cabinet reverses some of the fiscal restrictions of the previous administration.

That is feeding into a new optimism for the economy, says Czech Industry Confederation Vice-President Radek Spicar, although many will likely err on the side of caution for now.

"(Companies) will be investing more. Their investment appetite is increasing, that is for sure," he said.

"They see clear signs of improvement, they feel the situation is getting better, but ... companies are still very careful because what they've been through in the last few years has taught them a lesson."

Slumping demand at the height of the euro zone's debt crisis along with budget cuts and higher taxes under a former centre-right government had helped tilt the Czech economy into an 18-month recession that only ended last year.

But the economy - and mainly exporters - got a reviving jolt from the central bank's currency interventions last November to fight the risk of deflation. The move has weakened the crown by more than 6 percent, making Czech-made cars, auto parts, electronics and other goods more attractive.

WORKING LONGER SHIFTS

Otto Danek, who runs small electric motor maker ATAS Elektromotory Nachod and is vice-chairman of the Exporters' Association, said his sales are up 9 percent so far this year. He plans more hiring but is in no rush, illustrating a trend that analysts say show job growth will only come later.

"We should have 50-60 new people, but we have hired only 20 so far. We would rather do extended shifts and weekends (to meet higher demand)," Danek said.

The central bank has said the deflation risk has been averted, giving the economy a firmer footing. Other countries are still flirting with falling prices, including Poland and, notably, the euro zone, whose central bank's measures to pump money into the economy include charging banks to deposit funds.

The Czech central bank has committed to preventing the crown from firming beyond the 27 per euro level at least until the beginning of 2015, but has said several times that the probability is rising that the policy may be extended.

The crown traded at 27.48 to the euro on Friday, and has held in a tight range around that level since March.

DATA CASE GROWING

Data on Friday showed industrial output grew 7.7 percent year-on-year in April, above expectations, while new foreign orders increased 16.4 percent. Exports rose 11.2 percent.

That follows first-quarter gross domestic product data that put economic expansion at 2.5 percent year-on-year, the fastest in three years. On a quarterly basis, the economy grew by 0.4 percent, above central bank expectations. The HSBC/Markit PMI manufacturing survey came in at a three-year high this month and wage growth in the first quarter was the highest since 2009.

The central bank forecasts the economy to expand 2.6 percent this year after a contraction of 0.9 percent in 2013.

The bank said on Wednesday the GDP data showed a revival in household consumption and investments had a longer-term nature, evidenced in retail sales rising for a sixth straight month in April.

Analysts say the recovery is taking hold both in terms of external and domestic demand. The better mood is partly down to a government in power since January which has eased up on budget consolidation. The state is spending more, helping construction firms: state railway projects worth 38 billion crowns ($1.9 billion) are seen in 2014, Transport Minister Antonin Prachar said in March.

Companies are also counting on increased demand from Europe, especially in the important car sector. TPCA, a car plant run by Toyota Motor Corp and PSA Peugeot Citroen, had been hit by falling demand for its small car models in Europe's slowdown but expects to raise production by 14 percent this year to 210,000 vehicles.

"This year we are going to recruit another 700 people because of the renewal of a third shift in October," spokesman Radek Knava said. "We are expecting production to increase because of new models and a recovery in the European market." (Additional reporting by Robert Muller; Editing by Ruth Pitchford)

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