KB’s macroeconomic forecast: wage growth – better late than never

Press release

Prague, 4 May 2015 – The Czech economy is set to grow at the fastest rate for the past eight years. As last year, the main driver of the Czech economy is domestic demand this year. Economic growth will generate additional jobs, thus helping to reduce unemployment; we will see a faster acceleration in wages in 2016. Average inflation will stay at last year’s low values. On the other hand, core inflation will safely nestle in the black, and we therefore do not expect any change in the monetary policy. Nothing is expected to change in the nature of the intervention regime, including the intervention level of CZK 27.00/EUR, this year.

For this year we have revised our January forecast of GDP growth upwards by 0.6 pp to 2.9%, mainly thanks to the Czech economy’s better performance in 1Q 2015 supported by a faster growth in the EMU and Germany. We have left the outlook for next year unchanged at 2.7%. Growth continues to be based on broad fundamentals. Recovery in export markets and rising internal demand are supporting industrial production. The construction industry will be helped by the real estate market and public spending on infrastructural projects. Even the service sector is set to perform well as services are positively responding to developments in other sectors, the growing internal demand, and developments in the external environment.

Internal demand will drive growth this year. Household consumption is set to rise by a significant 2.8%, fixed investments by as much as 7.5%, and government consumption by 1.8% this year. Household consumption is being pushed up by the improving situation on the labour market as the employment rate and real wages are expected to rise by 1.3% and 1.7% respectively. Fiscal expansion, resulting in households’ available income growing in real terms, will also generate a fair contribution. Investment activity will be supported by fiscal policy helped by the EU funds, as well as a higher use of capacities in the manufacturing industry and the recovering real estate market. Exporters will benefit from the stable forex environment this year again and, in addition, we expect stronger demand on the part of our most important trade partners headed by Germany.

The current economic recovery is robust enough to generate new jobs and cutting the unemployment rate,however, still not to a level capable of spurring a more appreciable wage growth. This year we already expect the unemployment rate to drop so much that hiring or retaining skilled labour will become a problem. Next year, this situation will result in wage growth accelerating. While wages will grow at a rate of 2.1% this year, the figure may be 3.6% next year.

Higher inflation for the last three months has prompted us to revise the inflation outlook for this year upwards by 0.5 pp to 0.4%. The main reason was a stronger growth of regulated and core prices. Inflation is therefore expected to stay at last year’s level this year. We continue to expect consumer prices to grow by 2.0%, i.e. at the level of the CNB’s inflation target, next year.

We see risks to the forecast in the external environment. Nevertheless, should these risks materialise, this should not have such a heavy impact as in the crisis years, since a drop in external demand would be cushioned by internal demand. At home, the key risk to this forecast is failure of investments achieving the dynamics that we are expecting. The private sector may see a dampened sentiment due to stronger caution exercised in decision-making on investments, while the risk for government investments rests in delayed progress in investment projects financed from the public purse.

Source: Economic & Strategic Research, Komerční banka.

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