Czech trade surplus grows in May but exports sag

Source: www.forbes.com

PRAGUE, July 4 (Reuters) - Czech foreign trade showed a bigger-than-expected surplus in May, sending the crown currency to an all-time high, but relatively weak exports underlined worries about the currency's effect on future economic growth.

The monthly trade surplus grew to 9.22 billion crowns ($612.9 million) in May from 8.28 billion in April and was above the 6.5 billion forecast in a Reuters poll .

Fellow central European EU member Hungary revised its April trade surplus to 64.1 million euros from 54.1 million on Friday, marking a turnaround from a deficit last year.

The Czech news propelled the crown to 23.72 to the euro, a fresh record high, following 23.74 reached overnight and 23.83 late on Thursday.

Trade figures have been under close scrutiny in the Czech Republic. Highly dependent on external demand, it is expected to come under pressure from a western European economic slowdown and its strong currency, which has gained 17.4 percent against the euro over the past year.

The Czech Statistical Bureau (CSU) said exports were flat in crown terms in May, while imports dropped 2 percent year-on-year. In euro terms, exports grew 12.5 percent and imports rose 10.3 percent.

These figures worried analysts who said they were a sign that the overall economy would take a hit later this year.

'Here, the combination of weakening foreign demand and the strong crown is showing,' said Jan Vejmelek, an analyst at Komernci Banka. 'The data confirms our pessimistic outlook for further May data from the real economy. We are especially concerned about industrial output.'

That view was echoed by the central bank, which said in the minutes of its June 26 monetary policy meeting that the crown was a major anti-inflationary factor that would affect inflation and output.

'It was said that the exchange rate had recorded its highest-ever nominal year-on-year appreciation and it was repeated several times that if this situation were to continue it would inevitably have impacts on inflation and economic growth,' the bank said in the minutes, released on Friday.

'There was broad agreement that the impacts of the appreciation on prices and real economic activity would show up mainly at the end of this year and the beginning of the next.'

Many export companies have called on authorities to act to stem the crown firming, saying they could not handle such a pace of appreciation. Analysts say the unit has strengthened mainly due to strong trade performance, economic fundamentals, and its status as a safe haven during times of risk aversion.

The central bank targets inflation only and has refrained for years from intervening in the foreign exchange market.

Analysts have said exporters have increasingly been hedging against the crown's rise, but the hedges typically needed to be refreshed at stronger levels, which delayed rather than removed the exchange rate impact on companies.

Economic growth slowed to 5.3 percent in the first quarter from 6.3 in the previous three months, and more cooling is expected.