Komerční banka’s macroeconomic forecast: households not about to lose their spending appetite

Press release

Prague, 2 November 2015 – The Czech economy will grow at the fastest rate of more than 4% since 2007 this year. It has been growing faster than the eurozone as a whole for almost two years; and it will grow by almost 3 pp for FY 2015. The process of catching up, which was strong in the pre-crisis decade, is therefore visible again.

However, this year can be regarded as an exceptional year, and growth will slow down to less than 3% next year.What makes this year so exceptional? First of all, the use of the EU funds. This year marks the last chance to draw all the funds allocated for the 2007 to 2013 programming period, which is mainly reflected in infrastructure investments. The second factor is the plunge of oil prices and, in turn, fuel prices. This has ultimately resulted in a larger amount of disposable funds held by households and companies, encouraging both consumer spending and capital expenditure. The third factor is the change in the rules for tobacco product taxation.

We can see economic growth virtually everywhere, in all sectors of the national economy. And since it has been here for more than two years, we are also seeing improvements in the labour market where it has been mainly reflected in the record employment rate. On the other hand, the rate of unemployment is attacking the lowest level since 2007, which has begun triggering stronger pressures for wage increases. These pressures are expected to intensify next year and wages may grow by up to 4%. Households are therefore not about to lose their spending appetite next year.

But inflation will also go up. In the last three months, inflation surprised by its low rate but this was imported inflation. We continue to expect the inflation target to be achieved by the end of next year. This should make it possible for the CNB to exit its intervention regime in Q3 2016 following two potential personnel changes in the CNB’s Board. The risk scenario, 40% likely to materialise, envisages the exit as late as Q1 2017.

In summer, the CNB’s CZK 27/EUR FX floor was under pressure and the central bank has been intervening in the market since mid-July. It bought almost EUR 5bn over the two holiday months. Comparisons with Switzerland are appearing quite frequently but in our opinion, such comparisons are rather lame. In our opinion, the current or future level of forex reserves does not constitute any limit for the CNB’s interventions. However, the eventuality of speculators waging stronger attacks at the FX floor implies a higher risk of the CNB cutting its deposit rate to negative values. The rising probability of another cut in the ECB’s deposit rate, perhaps at the December meeting, is working in the same direction. We ascribe a probability of 40% to the scenario of negative Czech rates.

We see risks to the forecast mainly in the development of the external environment, such risks clearly stemming from a lower growth, also in the light of the ECB’s most recent ‘dove’ actions. A big question mark is hanging over the impact of the Volkswagen case on the automotive sector, which is crucial for the Czech economy. For the time being, we do not believe that the case will damage the Czech automotive sector as a whole.

Source: Economic & Strategic Research, Komerční banka.

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