* Czechs hunker down in recession, save more
* Tax hikes, spending cuts put consumers and firms on defensive
* Economists see recovery only next year at earliest
By Michael Winfrey and Jana Mlcochova
PRAGUE, Dec 7 Angry at government austerity measures and fearful of losing jobs, Czechs keep piling their cash into savings - confounding authorities' efforts to end the country's longest recession in 15 years.
The central European nation's economy shrank for a fourth straight quarter from July to September, data confirmed on Friday, making its economic contraction the longest in the European Union outside the euro zone.
Economists expect the trend to turn around only towards the end of next year. For now, households in the country of 10.5 million people are tightening their grip on spending and companies are reducing investments, undercutting car, electronics and other exports that are usually responsible for around 80 percent of growth.
Drahomira Lexova, a 35-year-old accountant on maternity leave, is emblematic of a mood that puzzles economists here.
Rather than dipping into savings to keep her family's consumption stable, she and her husband have not only cut spending but they are putting more of their 45,000 crown per month ($2,300) income in the bank.
"I'm worried about the overall situation. The mess in Europe scares me because companies in this country are so intertwined with the West and no one can be sure of their jobs," she said.
"We are saving much more than before," she said.
Economists say that normally in a time of sliding wages, record low interest rates, and falling inflation, consumers shift to cheaper goods and services and often tap savings or borrow to keep their living standards stable. But not here.
Since the recession began in September 2011, growth in Czech bank deposits has risen on an annual basis from almost zero to 8.3 percent now, far above the long-term trend.
That is despite the return on deposits hovering at around zero at big Czech banks - a result of the central bank slashing its benchmark rate to a record low of 0.05 percent.
"In normal circumstances when real household incomes fall, they dip into savings and try to balance their consumption," central bank Vice Governor Mojmir Hampl told Czech radio this week.
"We have it completely backwards. The complete loss of faith in the future has made us overly cautious."
COMPANIES SAVING TOO
The Czechs have always been one of the EU's most financially cautious nations, with bank deposits exceeding outstanding loans. Its lending sector capital reserve buffers are double those of most members of the bloc.
Prime Minister Petr Necas has bolstered that attitude, naming debt "public enemy number one" in March and pushing through tax hikes and spending cuts to put the 2013 budget gap under the EU's ceiling of 3 percent of gross domestic product.
He has spent fleeting political capital to pursue the belt-tightening campaign as well. His three-party government lost its parliamentary majority last month in a battle over a law to raise consumption tax and will struggle to approve it after its rejection by the opposition-controlled Senate.
Under growing evidence that austerity is a main cause of the recession and criticism from the central bank that government policy was undermining efforts to jump start spending, Necas has said the tax hike would be the last squeeze on consumers.
But most have already hunkered down.
Although mortgages and corporate lending is growing slowly, banks are still cautious, tightening collateral rules and increasing lending margins in October, while successful firms are wary of taking more debt to invest or expand.
According to a survey taken by the Czech banking association, 61 percent of small and medium-sized firms plan to invest in their business in the next five years, but 70 percent intend to use their own funds, rather than borrowing.
"Clients that are well risk-rated, they don't want credit, and so there is no demand for lending," said a banker dealing with loans to small and medium-sized businesses in the Czech Republic who did not wish to be named because he is not authorised to speak to the media.
He said demand was instead coming from more risky businesses, "so if we want to expand lending, we'd have to consider pushing into this area of higher risk, and that's not something we would do lightly."
That has put the central bank into a bind. With no room left to cut interest rates without going into negative territory - charging those who deposit money - it is now considering actively weakening the crown currency against the euro, hoping the risk of rising inflation might spur spending and deter savers.
But economists said it will probably take until the middle of next year to persuade people to start spending again, a sentiment evident from the mood of Czechs on the streets of Prague.
"The government's policy is insane. It is a rightist government, and they pledged to not raise taxes. And what are they doing? The exact opposite," said Jakub Macek, a 33-year-old financial sector worker who makes over 100,000 crowns a month.
"Everything is more and more expensive all the time, and the economy is getting hammered. I am saving more for my pension and I've increased my investing to about a fifth of my income."