Czechs hope wealth-destroying floods can lift growth

Reuters News
Posted: Jun 13, 2013 7:24 AM
Czechs hope wealth-destroying floods can lift growth

By Michael Winfrey

PRAGUE (Reuters) - Floods that have caused billions of euros in damage across central Europe may actually provide an economic boost for the Czech Republic, a country struggling to shrug off its longest recession in more than two decades.

Governments and insurers from Germany to Romania will have to pick up the costs of helping families and business recover from the floods, which have killed at least a dozen people and driven hundreds of thousands from their homes since the start of June.

But central bank Governor Miroslav Singer cautioned against confusing gross domestic product (GDP) growth with wealth.

"The repair of flood damage will probably result in an acceleration of the tempo of GDP," he predicted in a presentation last week, adding: "This variable measures economic activity, or the creation of new value each year; GDP does not measure wealth!"

The rising waters have forced factories to halt production and snarled logistics, cutting into output, while sludge dredged up from river bottoms has wiped out crops in low-lying areas in the Czech Republic and elsewhere.

Those factors, however, could be outweighed - if only just - by the funds will governments pump into rebuilding infrastructure and the cash families and firms will spend on replacing lost or damaged items.

Singer said that the floods would destroy some of the country's wealth but repairs would create new output, boosting GDP growth by tenths of a percentage point.

With the government expecting no growth this year, that could potentially lift the Czech Republic out of contraction.

Economists said it would particularly aid construction, a sector that fell 11.4 percent in April versus a year earlier.

"The rebuilding of roads and railways and bridges and houses and infrastructure damaged during the floods will generate GDP growth," said Neil Shearing, an economist for London-based Capital Economics.


In Slovakia, Hungary and Romania, where water levels remain high in some places, officials have yet to estimate the damage.

But ratings agency Fitch said damage in worst-hit Germany could be as much as 12 billion euros ($16 billion), more than the cost of floods in 2002 when water rose to similar levels.

The Czech Insurance Association estimated they would have to spend 7.5 billion crowns ($390 million) on claims, while the country's Agriculture Chamber estimated a bill of 2 billion crowns ($104 million) more due to flooded farmland.

Still, governments and companies have announced relief funds, and insurance payouts will go straight into the economy, rather than staying on financial institutions' books.

German Chancellor Angela Merkel has said there will be "no upper limit" to state aid, and sources in her centre-right coalition said Berlin would set up an 8 billion euro fund. Insurers are expected to pay 3 billion more to claimants.

The Czech government has pledged to spend 7 billion crowns ($364 million) on infrastructure and other repairs and forgive another 5 billion crowns in taxes for affected firms.

Majority state-owned utility CEZ has agreed to forego prepayments from affected customers for up to three months, a move economists say will free funds to boost flagging consumption, a main cause of a recession that analysts say could be in its eighth consecutive quarter.

"It does not mean some kind of significant boost, but will... it mean a boost to demand and the creation of new jobs? Well, logically it will," Finance Minister Miroslav Kalosuek told Czech Television on Tuesday.

"If we take just the normal households, and how many brooms, bleach and rubber gloves they must suddenly buy, that is demand. There will also be demand in construction, demand in renewing roads, higher demand for certain goods and services. And higher demand is pro-growth."

(Reporting by Michael Winfrey; Editing by Ruth Pitchford)