News

Inflation on the rise

After a surprisingly strong increase in October, consumer price inflation is set to further accelerate and is set to hit the 2% level early next year. Real economic statistics are set to show continued growth of activity in the Czech economy even though the yoy comparisons will be dampened by fewer working days. Industrial production will print only a small growth figure, and construction is set to continue its yoy declines. The share of unemployed cut one tick according to our forecast, proving the comfortable position of consumers. Retail sales should also confirm this with solid growth.

The first Czech GDP reading showed a significant slowdown of the economy in the third quarter this year. Qoq growth printed only 0.3%. We expect the second reading will reveal growth was impeded by a lower external trade surplus and smaller inventory build while private consumption accelerated, in our view being the stable contributor to GDP.  

The forward-looking indicators showed mixed results in October. While the confidence in industry measured by the CZSO slightly declined, Czech PMI improved more than one point. Production at the Kralupy refinery (which was out of order following a crash) and the Litvinov refinery moved to full operation after a period of trial operation. However, we saw a decline in car registrations in the euro area followed by lower production of cars at Czech factories. Thus, we expect that industrial production increased only 0.5% yoy in October. The external trade surplus has, according to our estimate, decreased to CZK 17.4bn from 20.9bn in September. The commodity balance remained unchanged while the ex-commodity balance slightly deteriorated.      

The construction sector is still waiting for a revival. Construction activity remains subdued as the public sector is still not spending on infrastructure. There is also a long-term problem with Prague’s building planning. Overall, we expect the construction sector to print a decline of 7.5% yoy.   

Growing employment in the industrial sector pushes unemployment further down. Our models show that the share of unemployed decreased one tick and the headline figure should thus remain at 5% as its further decline is impeded by seasonal effects. The continuous decline in the unemployment rate creates wage pressures. We expect real wages have increased 3.7% in the third quarter of the year.

Consumers’ situation still remains comfortable. A decline in the unemployment rate, growing wages and a stable growth outlook translate into improving consumer confidence. Retail sales should thus retain their favourable growth dynamics. We expect retail sales adjusted for cars to increase 3.7% yoy. Car sales increased 2%, according to our estimate, leaving total sales growth at 3.1%. Adjusted for calendar effects, total growth would print 4.9%.     

Inflation accelerating due to food price growth

The price level in the Czech Republic should continue increasing. The main leader of growth is food. Food was also the driver of price dynamics in the euro area. We also witnessed growth in food prices in the German border regions. The price of food in Bavaria increased 0.7% mom, and in Saxony it jumped 1.2%. Our estimate for the Czech Republic indicates a food price increase of 1.6%. On the other hand, we see only a minor increase in fuel prices as the global oil price remained virtually unchanged on average in November. Core prices should record a seasonal decline. However, the decline will be not big enough to drag overall price growth into the negative. Thus, we expect prices to have advanced 0.2% in November. Overall inflation should print at 1.4%. The inflation rate should further accelerate at the turn of the year. We expect the inflation target will be hit already in the first few months of 2017, which will allow the central bank to remove the FX floor in the second quarter of next year.