Komerční banka’s macroecononic forecast Investments: The driver last year, the brake this year

The early months of this year have clearly shown that last year’s boom in public investments co-financed from EU funds was significantly, but only temporarily, underpinned by tapping the last EU money from the preceding programming period. A new programming period has started, and the amount of available funds is not significantly smaller. However, we are seeing again a slow start-up of calls for proposals financed from these funds under the current programme. Still worse, complications are appearing in connection with too old EIA reports on construction projects, preventing us from tapping into EU funds for investment co-financing. Unfortunately, this will have a major impact on the investment process in the public sector this year. And it is already visible from the volume of the public construction contracts being put up for tender. Thus, civil engineering is facing a difficult year 2016. In addition, the buildings sector has to tackle problems surrounding regional development plans, which often prevent a number of projects from launch, including those in Prague.

On the other hand, Czech economic growth continues to be so robust that it will still help to improve the labour market. Employment in the Czech Republic is the highest ever and it will be gradually increasing this year again, resulting in a continued decline in unemployment, albeit not as fast as earlier. The labour market is already reaching its limits. It is becoming increasingly difficult to find skilled workforce in many regions and sectors. This is clearly illustrated by the large number of vacancies, currently almost 120,000 at Job Centres alone. Wage growth will therefore continue accelerating and it will attack 4% this year.

An extremely low-inflation environment continues to prevail in particular due to energy and food, which are still cheap globally. In the case of the Czech Republic this situation will stay here for most of this year. We expect inflation at 0.6% on average, i.e. a figure starting by zero for the third year in a row. It was the downward revision of our inflation outlook which has resulted in our changed view of the monetary policy: we see the CNB exiting its FX floor mode not earlier than in Q3 17, providing that the central bank will be active on the market with its forex interventions for at least another two quarters, limiting increased volatility in both directions. Because of the expected inflow of arbitrage capital we expect negative rates for bank deposits over a set ceiling, specifically -0.5%, at the time of the exit.

A major unknown of a global nature that can also have a fundamental impact on the Czech economy and financial markets is the June referendum on the UK leaving the EU. We attach a 45% probability to this event. Potential Brexit would cause, first and foremost, a shock and uncertainty; these would be reflected in a high volatility on financial markets and subsequent negative impacts on economic performance in both the UK and the remaining EU member states, including the Czech Republic. In such a case, the CNB would keep the FX floor until 2018. 

Source: Economic & Strategic Research, Komerční banka.

Note: (*) external trade as per cross-border statistics; (**) inflation components net of primary impact of tax changes