UPDATE 1-Czech GDP beats forecasts with 5.8 pct growth

(Adds comments, details, updates prices, adds unemployment)

By Jan Lopatka

PRAGUE, Dec 8 (Reuters) - Czech economic growth beat expectations in the third quarter as consumers loosened their purse strings and companies continued spending on new equipment, official data showed on Friday.

Gross domestic product rose 5.8 percent year-on-year, extending a slowdown from the 6.7 percent peak seen at the end of the last year.

But the result beat market expectations of 5.2 percent growth and kept the country well on track to catch up with richer west European nations, despite months of political crisis since an inconclusive election in June.

"On the one hand the growth means we are slowly approaching the economic level of the euro zone, on the other hand this growth notably lags Slovakia where third quarter GDP rose by record 9.8 percent," the Czech Banking Association said in a report.

Slovakia has become a model in central Europe for economic reforms, slashing taxes and spending and aiming for euro adoption in 2009, a target none of its neighbours are in a position to consider.

The Czech economy ran neck-and-neck with Poland and outpaced Hungary, which reported 3.8 percent growth on Friday. The euro zone grew by 2.7 percent in the third quarter.

Fixed capital formation, the measure of investments, rose by 7.2 percent, while inventories grew and household consumption rose 4 percent.

"The contribution of foreign trade, which had been the key source of growth ... is receding and is being replaced by expenditure on final consumption and capital formation," the Czech Statistical Bureau said.

INFLATION TO PICK UP

The fast growth has helped slash unemployment, which extended its slide to 7.3 percent in November, according to Labour and Social Affairs Ministry data on Friday.

The rise in consumption reflects the improved labour market as well as wage rises and cheap credit, all factors pointing to higher inflation down the road.

"The development of the structure of GDP is biased toward potential inflation pressures and speaks in favour of a future raising of interest rates," said Ales Michl, an analyst at Raiffeisenbank, adding he expected a 25-basis-point tightening in the first quarter next year.

The central European country has kept interest rates at 2.5 percent, a full percentage point below the euro zone, thanks to a firming crown currency which has kept inflation in check.

The statistics office said in a separate data release that consumer prices dipped 0.1 percent in November, in line with forecasts, on falling prices of natural gas and motor fuel, to put the annual inflation rate at 1.5 percent.

It also cut its first quarter GDP growth estimate to 6.4 percent from 7.1 and second quarter expansion to 6.0 from a previously reported 6.2 percent.

The crown currency <EURCZK=> slightly firmed after the data, trading at 27.96 to the euro at 1010 GMT from 27.99 ahead of the data. (For full table of Q2 GDP data ............. [nL08844200]) ((Reporting by Jan Lopatka, editing by Ruth Pitchford; prague.newsroom@reuters.com; Reuters Messaging: jan.lopatka.reuters.com@reuters.net; +420-224 190 474))

Keywords: CZECH ECONOMY/GDP