Komerční banka’s economic forecast – investments rebounding

Press release

Prague, 24 October 2017 – The Czech economy’s growth this year will be one of the strongest for the last ten years. Basically all components of demand will support growth. This year, we at last see companies’ increased investment activity and next year the public sector will have to accelerate; otherwise, we will be deprived of money from the EU’s funds. Households are also benefiting from the growing economy thanks to the high rate of employment and rising wages. Their growth has gathered momentum; it is the strongest since 2007 and will not slow down in any significant way next year. Until the end of 2018, wage-driven inflation will stay above the 2% inflation target. The CNB will therefore continue to hike the rates at a rate of a hike per quarter.

According to Komerční banka’s revised forecast the Czech economy will grow at a rate of 4.4% this year. Compared with its early August forecast of 3.7%, this is a significant improvement that is mainly attributable to the published 2Q result. “The 2Q result has really shocked us although our estimate was the most optimistic in the market,” explains Jan Vejmělek, Komerční banka’s Chief Economics, adding: “Over the three months that followed the actual result basically caught up with our optimistic growth forecast.” Estimating a growth of 3.6% for 2018, Komerční banka is the most optimistic in the market.

Although the Czech economy’s dynamics apparently slackened somewhat in 3Q, expansion will pick up steam again in 4Q and will lay the foundations for next year. This year’s so far favourable constellation in the global economy will continue to help Czech exports. However, internal demand will play the main role of the driver of the Czech economy. Households’ stable and high consumption, growing at a rate of around 4% in real terms, remains the cornerstone for the Czech economy’s growth. Households’ spending appetite reflects long-lasting economic growth, low unemployment and wage increases. And Viktor Zeisel, a Komerční banka economist, adds: “The shortage of labour in the market will continue to pressure for further wage increases. In 2018 again, households can look forward to earning six to seven per cent more on average than this year.”

Investments are becoming the primary factor. Increasing investment activity in the private sector is apparent already this year; non-financial companies are mainly investing in plant and machinery. “Manufacturing companies have to invest to improve their productivity,” claims Viktor Zeisel, adding that “this is the only way for them to increase their output given the shortage of labour.” Next year, the public sector will join the private sector. According to Jan Vejmělek, “in fact, 2018 will be a sort of a déjà-vu of 2015.” Viktor Zeisel adds: “EU funds will support public investment, since a part of the allocated funds must be drawn by the end of 2018 under the n+3 rule.”

Despite the growing economy and improved collection of taxes we are concerned about increased public expenditure. The reasons include, on the one hand, higher capital expenditure, but on the other hand mandatory expenditure will also rise at a fast pace due to the pre-election decisions. “For the first time since 2011 we therefore see a risk that next year, the result of public budgets will be worse than the pre-approved result,” Marek Dřímal, Komerční banka’s strategist, forecasts.

The strong internal demand is also reflected in the development of inflation. We estimate this year’s average inflation at 2.4% driven by core inflation in addition to food prices. The high core inflation will compel the CNB to tighten the monetary conditions even more. In this respect, the central bank is being helped by the koruna rate. Thanks to the exit from the FX commitment the koruna is the most profitable currency in the world this year. And it will continue in its appreciating ride. “We expect that by the end of 2018 the koruna rate will drop to less than CZK 25/EUR,”predicts Jan Vejmělek. Viktor Zeisel adds that “however, in its model the CNB probably envisages an even more aggressive appreciation of the koruna”. The CNB’s forecast therefore underestimates the necessity to hike interest rates. “Although the CNB’s new forecast will not indicate this, we expect that its Board will ultimately vote for rate hikes in each of the forthcoming quarters until the end of 2018,” Viktor Zeisel clarifies Komerční banka’s forecast.

The domestic and global economy is expanding but this time of plenty will not last forever. “In particular the US has already reached the stage of advanced expansion,” claims Jana Steckerová of Komerční banka, adding: “We are receiving a number of signals that the end of this stage is approaching.” If Donald Trump fails to deliver the promised fiscal stimulus in the form of lower taxes this can be a scenario for as early as 2018. The Czech economy would then suffer heavily mainly from a plunging demand for automobiles. David Kocourek, Komerční banka’s economist, claims that “the already prominent role of the automotive sector in the Czech economy in recent years has gained even more weight, making the Czech economy very vulnerable to any significant decline in global and, in turn, European demand. And although it is not yet apparent in European numbers global demand for automobiles is beginning to weaken.”

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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; (**) inflation components net of primary impact of tax changes