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Czech economy slips into quarterly drop as inflation darkens outlook

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The Czech economy fell 0.4% quarter-on-quarter in the July-September period, according to preliminary data on Tuesday, showing its first quarterly decline since the start of 2021 as a key manufacturing survey also pointed to tougher times ahead.

The quarterly gross domestic product decline comes as analysts and the Czech National Bank expect the country to tip into recession, with soaring inflation and energy prices hitting consumers and businesses alike.

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The Czech GDP data is the first from the third quarter in the central Europe region, likely signaling the sharp slowdown being felt around the region as domestic demand fades quickly.

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“High inflation will have an adverse impact on consumption and GDP as a whole in the final quarter of the year, and the Czech economy is likely to go through a technical recession,” Radomir Jac, chief economist for Generali Investments CEE, said.

On a year-on-year basis, Czech GDP rose 1.6%, slowing from a 3.7% increase in the second quarter, the data showed.

The Czech statistics office said household consumption fell for a fourth straight quarter, contributing to the quarter-on-quarter decline.

Czech inflation hit 18% year-on-year in September and its impact has seeped throughout the economy, with consumer confidence at an all-time low and businesses starting to struggle to pass on soaring costs for energy and materials.

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The decline in the Czech S&P Global Purchasing Managers’ Index (PMI) deepened to 41.7 in October, data also showed on Tuesday, below the 50 mark dividing expansion from contraction for a fifth month.

The data will add to Czech central bankers’ arguments to keep rates stable when the bank meets on policy on Thursday.

The main policy rate has risen 675 basis points since June 2021, to 7.00%, but has been on hold at the last two meetings in August and September as the economy wanes.

Other rate setters around central Europe have also sought to keep borrowing costs steady after year-long tightening cycles, but face challenges with inflation at double-digit rates and currencies under pressure in shaky global markets. (Reporting by Jason Hovet in Prague Editing by Mark Potter)

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