Czech Republic - Economic update January 2019
Economic growth seems to be resilient…
The revised GDP estimate for the third quarter of this year confirmed the Czech economy’s overall strong condition. More interestingly, fresh fourth quarter data point to ongoing resilience of the Czech economy in light of growing nervousness on global markets. The Czech data clearly contrast with more pessimistic figures coming from the German economy.
Industrial production remained strong in November, growing by 0.9%
mom (1,5% YoY) driven mainly by strength in the auto and electronics
industries. On the other hand, the chemical industry and the
electricity producers weighed negatively on overall production. More
importantly, new orders remained solid, growing 5.3% YoY mostly thanks
to sharp growth in domestic orders. These are promising signals
looking ahead into 2019, as the car industry especially appears to
have recovered moderately after the dip in Q3 2018.
Figure CZ1 - Industrial production (yearly change, in %)
...mainly thanks to a tight labour market
Domestic orders play an important role in growth as the economy is more and more dependent on domestic demand (household and government consumption plus investments). The growing importance of domestic demand is mainly due to tight labour market conditions that encourage both consumption and investments. Looking at the latest data, the labour market picture remains rosy. Unemployment rose to 3.1% in December (from 2.8%), but that was mainly due to seasonal factors. Meanwhile, the December unemployment rate remains the lowest December value in 23 years and the number of unemployed people declined by 49,000 compared to a year earlier. As a result, we continue to believe that strong (but slightly slower) wage growth will continue to support rather robust household spending in 2019.
So far this is confirmed by strong November retail sales figures at 5% yoy real growth (ex-cars). Most encouraging is the strong growth of the non-car, non-food and non-fuel component, which stands above 7% yoy in real terms.
Overall, the fresh batch of Czech macro data point to an expansion of nearly 1% qoq at the end of 2018 according to our nowcast. That is a surprisingly resilient picture, especially in contrast with Germany, where the sudden fall in November industrial production was pronounced. Nevertheless, looking ahead we believe that a more challenging external environment and higher risks may cool down the Czech economy slightly more than we expected. As a result, we now see the Czech economy growing at 2.6% in 2019 (from 2.7% previously).
CNB set to hike despite slower growth and lower inflation
The slight downgrade of growth expectations for 2019 does not have any impact on our CNB interest rate policy outlook. We continue to believe in one additional interest rate hike in 2019 as early as February despite a slightly lower growth trajectory and the fact that Czech inflation remains below the latest CNB projection. In December, inflation declined to 2.0% yoy, which is 0.5 percentage points below the CNB forecasts. This was mainly due to lower food and fuel price growth. On the contrary, core inflation was slightly higher at the end of the year. Looking ahead, we believe regulated prices together with higher food inflation should push inflation higher at the beginning of 2019.
The CNB is primarily focused on more stable domestic inflation pressures within core inflation. As core inflation remains elevated at 2.6% yoy, which is not far from the all-time highs of 2.8% (see Figure CZ2), and the labour market remains tight, comments from the CNB remain unsurprisingly cautiously hawkish and in line with our interest rate outlook.