Komerční banka’s economic forecast - Make trade, not war

Following its last year’s extremely high growth of 4.5%, the Czech economy’s growth is gradually stabilising at around 3%, a level at which it will stay for the rest of this year and also next year. Internal demand continues to drive the Czech economy; the external environment is overshadowed by the protectionist tendencies shown by the US President, Donald Trump, and the inability of Theresa May’s cabinet to finalise successfully the talks on the rules that will apply after the United Kingdom divorces from the European Union next year.

31. 7. 2018 13:45

Komerční banka’s updated macroeconomic forecast suggests that the Czech economy will grow by 3.0% and 2.9% in 2018 and 2019, respectively, in terms of the real GDP. This means a visible slowdown following last year’s 4.5%. “It is obvious that the Czech economic growth is already past its zenith,” notes Jan Vejmělek, Komerční banka’s Chief Economist. “As recently as a quarter of a year ago, we expected this year’s growth to hit 3.8%,” he adds. According to the author of the new forecast, Viktor Zeisel, several factors are behind the significant downward revision. “The fundamental factor was the disappointment caused by the national account statistics for 1Q, when the Czech Republic was growing at a much slower pace than its neighbours. The CSO’s revision of the time series also played a role,” he adds.

Domestic economy has reached its capacity limits.

“There is no room for employment to rise any more, and productivity is growing at a slower rate than we expected, although we do see a strong onset of investment.”

Viktor Zeisel, Komerční banka’s economist

However, the slowdown is not felt in the labour market. There, demand continues to outweigh supply and as regards any increase in unemployment, just no way. Quite the opposite, the pressure for wage growth will continue because of the tense labour market. Companies will pass through the increasing remuneration for employees and other increasing costs to the end consumers. Inflation will therefore stay safely above 2%.    

Following the publication of data in 2Q, the CNB’s May forecast, which envisaged stable rates for the rest of the year, has been left in ruins. Already the June rate hike has shown that the central bank intends to respond promptly to diversions of the course from its forecast. Together with the higher inflation, this is a reason for the CNB for an additional rate hike. “Our estimate is that rates will be hiked two more times before the end of this year. Next year should see another three rate hikes,” Viktor Zeisel comments on the outlook.

The reaching of the EUR/CZK 25 level has slowed down to the middle of next year. The weakening of the koruna during 2Q did not surprise only the central bank but also us. The Czech currency is paying for deterioration in the external environment. “The market players have again started to view the koruna as only one of the currencies of emerging markets. And these have fallen into investors’ disfavour because of the trade war escalations and the growth of dollar rates,” says Jan Vejmělek, adding: “The favourable fundamentals and the broadening interest rate differential will ultimately result in the recovery of the trend towards the koruna’s strengthening.”

Cheap interest rates are over for good, which makes new debt issues more expensive for the sovereign. “Inflation over 2% and the CNB’s and, quite soon, the ECB’s rising rates combined with the large bond issues this year and the need to refinance large volumes next year …” According to Jakub Matějů, Komerční banka’s strategist, all of this will be reflected in rising yields of government bonds: “At the end of this year, the government will pay 2.2% for newly issued ten-year bonds, and the demanded yields will continue to grow next year.” We expect the national budget to end up with a deficit of CZK 40 billion this year. “Although the income side of the national budget is rising, expenditure (in particular payroll expenditure) is outpacing income,” adds Jakub Matějů.

The threat of tariffs for automobile exports remains a major risk for the Czech economy. “China and its subcontractor countries, Taiwan, Malaysia, Korea, and Singapore, will suffer from the trade wars the most. On the other hand, the cost of imposing tariffs on China to the full extent would mean only 0.2 pp of the GDP per year for the United States,” summarises Jana Steckerová, Komerční banka’s economist.

“The meeting of Jean-Claude Juncker, President of the European Commission, and Donald Trump, the US President, has helped to put off the considerations of tariffs for imports of European automobiles but uncertainty persists, as we have already become accustomed with the US President. I have calculated the indirect impact on the Czech economy to amount up to 0.4% of the Czech GDP.”

David Kocourek, Komerční banka’s sector analyst
GDP (real growth, yoy in %)4,532,9
Household consumption (real growth, yoy in %)4,443
Fixed investment (real growth, yoy in %)3,76,72,1
External trade balance (CZK bn) (*)427391409
Industrial production (real growth, yoy)6,52,53,1
Retail sales (real growth, yoy in %)5,55,74,7
Wages (nominal growth, yoy in %)6,285,5
Unemployment rate (MPSV, in %)4,13,23,1
Inflation (yoy in %)2,52,12,1
3M PRIBOR (average)0,411,22,2
2W Repo (average)0,211,12,1
EUR/CZK (average)26,3325,524,9

Source: The Czech Statistical Office; the Czech National Bank; Ministry of Labour and Social Affairs (MPSV);
Macrobond; Economic and strategic research, Komerční banka

Note: (*) external trade as per cross-border statistics