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Despite a slight recovery in the Czech economy, the outlook remains uncertain

Company: Komerční banka, a.s.

The Czech economy improved slightly in May but still lags behind the pre-crisis level of economic activity. Despite a month-on-month increase of more than 10%, industrial production is about a quarter lower. Of the industries, the automotive industry is currently the worst performing. Unfortunately, the fall in new orders by almost 35% in May does not give much optimism to the future. Currently civil engineering, whose production increased 1.2%, cannot complain about demand. In building construction, on the other hand, production decreased 11%. Despite weak demand from the domestic and foreign economies, however, unemployment in the Czech Republic remains low for the time being, at 3.7% in June, according to the Ministry of Labour and Social Affairs. In our opinion, the main reason is the Antivirus programme.

According to CZSO data published today, industrial production increased 13.8% month-on-month in May, but continued to decline year-on-year by a significant 29.4%. After adjusting for the effect of the different number of working days, the decrease was more modest, amounting to 25.7%. This was roughly in line with our forecast while the market expected a slightly better result. The recovery in industrial production was mainly due to the easing of coronavirus measures. This happened in May both in the domestic economy and in the economies of our trading partners.

Although physical barriers to business have fallen, industrial companies still lack demand. Weak demand is mainly related to the uncertain development of the economy in the second half of the year. Economic growth is likely to recover, but there is a question of to what extent. The development of new industrial orders is not very optimistic for the time being as their value fell 34.7% yoy in May. Orders from both the Czech Republic and abroad fell at such a significant pace. Among sectors of the economy, orders in the automotive industry fell the most. Recall that automotive is an important source of added value and employment in the Czech Republic. The main point is that cars are luxury goods for which demand is logically declining in times of economic recession.

Along with industrial production, export growth remains low

The reopening of borders in May and at least partial resumption of production had a positive effect on the result of Czech foreign trade. It ended with a surplus of CZK 1.3 billion, while the market expected a deficit of CZK 8.4 billion. Exports recovered 12% mom, while the rebound in imports was more modest, when they increased 3.8%. However, the value of both exports and imports remains about a quarter lower than last year. In line with the above, the balance of foreign trade in motor vehicles deteriorated the most, falling by CZK 22.5 billion yoy. The overall balance was favourably affected by a smaller deficit in trade in oil and natural gas, partly due to a decline in their prices on world markets and then also due to lower domestic demand.

According to the Ministry of Labour and Social Affairs, total unemployment in the Czech Republic remains low

Weak demand starts to affect employment in selected sectors. According to May data, employment in industry decreased 3.6% yoy, while the average wage drop 6.1% yoy. Employment and average wage also decreased in construction, 2% and 0.3% respectively. According to today's data from the Ministry of Labour and Social Affairs, however, total unemployment in the Czech Republic was only 3.7% in June and is thus still the lowest in the EU. It is interesting that while employment significantly declined in mentioned sectors, at the level of the whole economy, the increase in unemployment is only very modest. One reason may be that redundant workers have found work in other sectors, such as agriculture. It lacks workers from abroad, moreover, during the harvest season. The situation is similar in the construction. It is therefore possible that without this substitution, the decline in employment in construction would have been higher.

While the production of civil engineering is growing slightly, in building construction it is declining significantly

The demand for construction work is growing only in civil engineering. While total construction output decreased 7.6% yoy, civil engineering production increased 1.2% yoy. Here, the main source of growth is probably government investment in infrastructure. These are likely to continue as the government has already declared its intention to direct much of its support to the Czech economy primarily to investment. The question now remains the investments of municipalities and regions, which are likely to struggle with lower budgets. The decline in total construction output is thus due to building construction. This, like the rest of the economy, pays for a higher degree of uncertainty, as a result of which it is not surprising that the demand for new housing in the Czech Republic is declining.

Government program Antivirus is currently preventing a significant loss of jobs

The main reason why unemployment has not yet risen significantly is probably the Antivirus program, which allows entrepreneurs to maintain jobs by helping them to finance part of the wage costs. As such, however, it only postpones the problem to the future. Moreover, this program is going to expire with the last of August. If it is not extended, which is currently being discussed by the government, a jump in unemployment can be expected from September. Nevertheless, a long-term maintenance of employment will require a recovery in demand, and in the case of industry, especially those from abroad.

Author: Martin Gürtler, Senior Economist, Komerční banka



Tags: Economics | Finance |

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