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3Q economic growth of 1.5% qoq fostered by household consumption

The second reading of Czech GDP for 3Q has brought a slight upward revision. The figure was increased to 1.5% qoq from the previous estimate of 1.4%. The qoq rate of growth was thus similar to 2Q’s 1.3% qoq. Given the problems faced by industry, we consider this a very good result. Due to a higher base effect, yoy GDP growth slowed from 8.5% to 3.1%, as 3Q20 was already marked by a partial economic recovery. Economic activity is still about 2.5% below the pre-crisis 2019 level.

The further recovery of the Czech economy in 3Q was driven mainly by household consumption, which increased by 4.2% qoq. The easing of COVID restrictions, reflected in improved consumer sentiment over the summer, had a very positive effect. Pent-up demand from previous quarters and favourable household finances – boosted by loose fiscal policy and a tight labour market pushing up wages – also supported private expenditure. After this strong growth in 3Q, household consumption now exceeds its pre-crisis level. On the other hand, fixed investment fell by 3.1% in 3Q after a 4.3% qoq increase in 2Q, likely due to subdued public investment.

The main drag on economic growth has been the persistent problems affecting industry. These include bottlenecks in international supply chains, reflected in critical shortages of some materials. The situation is particularly serious in the auto industry, where a number of manufacturers have been forced to repeatedly interrupt production. This was why manufacturing production fell by 2.8% qoq in 3Q and was also reflected in the markedly negative contribution of net exports to qoq GDP growth. However, this was partly offset by rising inventories, whose contribution to qoq GDP growth was a strong 1.9pp. Some manufacturers likely continued to stockpile unfinished products, with large parking lots full of unfinished cars being the most striking example. However, there is always a degree of uncertainty surrounding inventory data, so we may eventually see major statistical revisions.

Gross value added increased by 1.4% qoq. The main contributors were trade, transport, accommodation and food service, where value added grew by a total of 7% qoq. Other services also showed solid growth, with value added increasing by 2.1% qoq. All these sectors benefited from strong household consumption. On the other hand, manufacturing experienced a deep decline in value added of 3.1% qoq.

The last quarter of this year is likely to be marked by weaker economic performance. Problems with the supply of inputs in industry persist, and according to some indicators, they have worsened in 4Q. Another pandemic wave could have a further negative impact. This could be reflected in lower household consumption, which has been driving economic growth. Although the latest COVID-related restrictions have not significantly affected the economy, a higher risk of infection and general increase in uncertainty may result in lower household spending. Meanwhile, household purchasing power is being reduced by elevated inflation. In recent months, we’ve seen consumer sentiment worsen, partly due to the rapid rise in consumer prices.

We expect GDP to grow by 1.9% in 2021 and to accelerate to 3.5% next year.

Regards,

Martin Gürtler

Economic and Strategy Research

Komerční banka

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