Komerční banka’s economic forecast: On thin ice

The Czech economy is not growing at a dazzling rate, because it has been performing close to its full potential since mid-2017. Capacity limits prevent the growth dynamics from increasing. On the other hand, the growth has turned out to be sustainable. We regard the likelihood of a recession in the Czech economy as very low. However, in the light of heavy global uncertainties, there is a considerable risk of a rather significant downturn in economic dynamics.

2. 4. 2019 11:00

According to Komerční banka’s updated forecast the Czech economy will grow at a rate of 2.7% this year following last year’s 2.8%.

“Compared with the November update of our forecast we have therefore not revised the growth outlook.”

Jan Vejmělek, Komerční banka’s Chief Economist

The significant deterioration of the situation in German industry in the second half of 2018 has not been felt in Czech industry and its exports almost at all.

“In addition, we regard the slowdown in the German economy as temporary only.”

Jana Steckerová, Komerční banka’s economist

To a considerable extent, it was attributable to the German automotive industry suffering from the consequences of the change in type approvals and the new certification requirements for internal combustion engines. The Chinese economic downturn has also played a role.

While external demand is at risk, internal demand dominates. The tense labour market supports household consumption. The unemployment rate has hit record lows; by the ILO methodology it dropped under 2% in November, net of seasonal factors. On the contrary, wages are surging: they rose by a strong 8.5% last year, the fastest over the past 17 years. Since growth in productivity is lagging behind and companies are facing the risk of their lower competitiveness in terms of prices, they have to invest. And indeed, investments were the main driver of the Czech economy last year when public sector investments joined the private sector in the second half of the year. Internal demand will continue to be the factor supporting the Czech economy’s growth this year again but further acceleration is unlikely. Czech producers will face additional pressures on their profit margins and although wages will rise at a slower pace, it will still be a strong 6.9%. This is compounded by the uncertainties concerning external demand while for the public sector the main wave of EU funded projects ended in 2018. Thus, investments will improve by 2.2% this year after last year’s 9.0%.

The record employment and wage hikes will support household consumption again this year, although the rate of its growth will slightly decline to 3.2% from last year’s 3.5%. “The rising precautionary saving ratio has been apparent in recent quarters,” adds Viktor Zeisel, noting that “households are aware that the current pace of wage hikes is untenable”. Strong consumer demand is also reflected in figures illustrating inflation. Core inflation, i.e. without administered prices and food and fuel prices, has safely settled above the inflation target and will stay put throughout this year. After 2.1% inflation in 2018, we expect it to accelerate to 2.3% in 2019. Besides core inflation the causes will also include administered prices, since primarily electric energy is becoming more expensive.

The Czech koruna has coped well with the year-end effect and entered stronger into the new year. However, international risks persist and won’t let the Czech currency appreciate faster. One of the reasons is also the large amount of koruna liquidity, which prevents its exchange rate from returning to the long-term equilibrium. This is why the koruna will not strengthen below CZK/EUR25 in our basic scenario.

The CNB was the first bank in Europe to begin returning the monetary policy back to normal. It went a long way last year, for it hiked the rates as many as five times. The key reason was the robust internal inflationary environment despite the downturn in both Czech and global economy and rising nervousness in financial markets. At this moment the central bank is very close to the equilibrium rates and, moreover, the uncertainty concerning the external environment has become even greater. But the inflationary pressures flowing from the strong wage growth are persisting and the CNB will probably continue tightening its monetary policy. We expect the rates to be hiked two times this year. But it will probably not happen at the forthcoming Board meeting. “The statements we can currently hear from the CNB do not provide a clear picture but in our opinion, the uncertainties flowing from the external environment will prevail and the rates will not be changed in February,” clarifies Viktor Zeisel.

GDP (real growth, yoy in %)4,52,82,7
Household consumption (real growth, yoy in %)4,43,53,2
Fixed investment (real growth, yoy in %)4,192,2
External trade balance (CZK bn) (*)443393415
Industrial production (real growth, yoy)6,53,33,3
Retail sales (real growth, yoy in %)5,54,94
Wages (nominal growth, yoy in %)6,28,56,9
Unemployment rate (MPSV, in %)4,13,12,8
Inflation (yoy in %)2,52,12,3
3M PRIBOR (average)0,411,272,3
2W Repo (average)0,211,252,2
EUR/CZK (average)26,3325,6525,4

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

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