UPDATE 1-Czech Q3 growth tops forecast at 6 pct, seen ebbing

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By Marek Petrus

The Czech economy grew slightly more than expected in July-September, data showed on Friday, as investment and household spending sustained a robust expansion and bolstered market expectations of interest rate increases.

Gross domestic product (GDP) grew 6.0 percent year-on-year, the 10th consecutive quarter of expansion at this level or above, the statistics bureau reported.

This exceeded the median of economists' forecasts in a Reuters poll at 5.8 percent, and highlighted buoyant demand in the second largest central European economy. The crown dipped to 26.160 per euro but held within sight of record highs.

"The result is not surprising. As expected, consumption remained the main driver of this year's growth," said Jiri Skop, analyst at Komercni Banka.

Fixed investments and household consumption both contributed 2.6 percentage points to third quarter growth, while a surplus in foreign trade in goods and services added 0.8 percent.

The GDP rise ebbed from 6.3 percent in the second quarter, which was revised from a previously reported 6.0 percent.

Growing incomes fed by a manufacturing boom, rising employment, consumer lending expansion and welfare handouts were keeping the economy on track for growth topping 6 percent for the third year running in 2007, analysts said.

Tomas Holub, chief forecaster at the central bank (CNB), said the third quarter number was a little below the CNB's forecast of 6.1 percent due to weaker household consumption and investments than it had expected.

Government spending shrank whereas the CNB had expected a small mild rise, and net exports improved while the CNB had expected stagnation, said Holub, without giving any comment about the outlook for policy.

"TOPPING OUT"

Economists widely expect growth to slip to 4-5 percent next year, as tax increases and welfare cuts, plus a sharp rise in inflation and higher energy costs, combine to eat into wage increases and rein in consumption while export demand cools off.

"The data bear some signs of growth topping out," said Pavel Sobisek, economist at UniCredit. "We expect the dynamic to start slowing more visibly from the fourth quarter onwards, as private consumption will be hit by the inflation spike and by concerns of the economic reforms' impacts," he added.

The Czech expansion lagged the boom in neighbouring Slovakia, which posted 9.4 percent growth in July-September, as well as 6.4 percent growth in northern neighbour Poland.

However, the Czech economy outpaced the region's laggard Hungary, which reported 0.9 percent growth.

The central bank (CNB) raised the main two-week repo rate by 25 basis points to 3.50 percent in November, bringing it to its highest level in nearly 5-1/2-years.

Rates have risen from an all-time low of 1.75 percent in October 2005, and minutes of the CNB's Nov. 29 policy meeting on Friday showed the latest increase was a pre-emptive strike against a possible increase in inflation expectations.

Markets are gearing up for further policy tightening next year to clamp down on inflation, which is expected to spike to 6 percent early next year, reaching double the CNB's target.

"The labour market is very tight, and income growth is fast, which should boost consumption going forward. We expect inflation pressure to be a problem in 2008," said Istvan Zsoldos, economist at Goldman Sachs in London.

"We continue to expect that the board will eventually hike rates to 4 percent, closing the gap with the ECB (European Central Bank)."

(For INSTANT VIEW of GDP data, double click on [ID:nL07435890]) (For full TEXT of meeting minutes, click on [ID:nL07499522])

(Reporting by Marek Petrus; editing by David Stamp)

Keywords: CZECH ECONOMY/

[PRAGUE/Reuters/Finance.cz]