Czech Republic - Economic update June 2019
Discrepancy between soft and hard data continues
Although PMIs have been falling nearly steadily since the beginning of last year, even dropping below the 50 threshold this year, and some other soft indicators were poor as well, the Czech economy is still doing well (figure CZ). Based on revised Q1 growth figures, economic growth reached 2.6% (+ 0.6% quarter-on-quarter), i.e. one tenth of a percentage point higher than the preliminary estimate. The demand side was clearly supported by household consumption, stimulated by fast wage growth and record employment. The investment trend remains positive too, particularly in housing construction and investment in machinery, equipment and ICT. The latter are stimulated particularly by a lack of labour force in the economy (also see Box 3), which acts as a catalyst for investment and/or restructuring of the economy towards lower labour intensity in production.
Figure CZ – Czech economy still doing well despite drop in corporate sentiment
At the supply side of the economy there have been positive development too. All service sectors as well as industry and construction made positive contributions to GDP growth. This finding is surprising as sentiment indicators and industry statistics did not suggest such positive developments. For the time being, the recent monthly data are confirming a recovery in the automotive industry. Together with a boom in construction, including residential construction, this predicts a solid economic performance in the second quarter.
The stable economic growth continues to be reflected in the labour market performance; tightening tensions are still present. While unemployment remains at a record low, job vacancies and the vacancy rate are at their peak. Wage growth remains moderate with a rise just to 7.4% in the first quarter (+4.6% in real terms). We expect similar wage dynamics for the rest of the year. Faster wage growth does not seem to be leading to significantly higher inflation. Although consumer price inflation approaches the Czech National Bank’s (CNB) tolerance interval again, it has been caused mainly by the rapidly growing costs of housing and energy, with housing inflation representing more than half of the current annual inflation.
Although inflation is currently above the central bank’s forecast, the probability of an increase in interest rates any time soon is not high. The central bank is still satisfied by the performance of the economy, which is generally in line with its forecast. The only deviating factor is the Czech Koruna, which has not been strengthening at the rate the CNB expected. The CNB signalled that it is not worried, neither by the recent currency developments, nor by the slightly higher inflation. Despite monetary policy changes in the US and euro area, we do not expect the CNB to accelerate its interest rate process in any way. Rates are expected to remain unchanged for at least half a year before the 'normalisation' continues. Financial markets are even convinced that the central bank’s next step will be a cut in interest rates, and even in a one-year time frame. Moreover, the market situation is still being affected by the massive excess of liquidity, which has been largely generated by exchange rate interventions. The result is a steady, strong interest in government bonds, leading to a drop in bond yields well below the CNB’s two-week repo rate. This trend is happening despite the worsening in Czech public finances.