While production is suffering in the current recession, consumer demand has been relatively resistant so far. The March lockdown of entire sectors of the economy has primarily impacted on services, in particular those related to accommodation and tourism, and it has also been dramatically felt in automotive production. Rather surprisingly, household consumption has resisted. In fact the May retail sales were, in real terms, even higher than a year earlier. Households’ appetite to consume has been weakened relatively little because the labour market has deteriorated only a little. “The government’s Antivirus scheme and the preceding surplus of vacancies have significantly stifled growth in unemployment,” explains Michal Brožka, Komerční banka’s economist, adding: “The question is for how long.” This forecast envisages an extension of the scheme until at least the end of this year, which will also limit the rise in unemployment. We expect unemployment to peak over 5% at the beginning of next year.
In the economy, recession is traditionally associated with a trend of declining inflation, but its rate remained higher in Q2. Economic performance was rapidly falling, but inflation even returned above the CNB’s tolerance zone in June when it rose to 3.3%. In particular the acceleration of core inflation, which climbed to 3.5%, was a surprise. Michal Brožka notes that significantly higher import prices contributed to the higher rate of inflation. “We have therefore had to revise this year’s expected inflation from the original 2.4% to 3.0%. However, average inflation will be slightly below the CNB’s target next year,” Michal Brožka predicts. “Thus, the currently high rate of inflation will definitely not be a reason for the central bank to hike the rates at its Board meeting in August,” adds Martin Gürtler.