The Czech economy has slowed down. At the end of 3Q, dynamics in industry and retail sales decelerated. The economy lacks support from its main trading partners as growth in the euro area has disappointed this year. Inflationary pressures have not dissipated. October price growth was driven by food and fuel prices while the core element has recorded a modest increase.
After unconvincing dynamics in the first half of the year, the monthly data suggest the Czech economy continued sluggish growth in the third quarter. Part of the economy has been slowing due to production limits while some businesses lack support for quicker growth from the country’s main trading partners as growth in the euro area has been disappointing. That said, we expect a negative contribution of net exports to GDP dynamics. Domestic demand remains the main GDP driver. Household consumption is still supported by the tight labour market and strong wage growth. However, even household consumption has been slowing down. Households perceive an economic slowdown and have thus started putting aside precautionary savings, which is visible in the savings rate. In contrast, investment should maintain its momentum as capacity is a problem in many sectors. Moreover, public sector investment has increased given the need to tap EU funds (due to the N+3 rule) by the end of the year. We expect the Czech economy to grow 0.6% in 3Q, which corresponds to 2.5% yoy. We expect some acceleration at the year’s end as euro area growth should pick up, led by Germany. The all-year growth should print 2.9%. We described the mid-term outlook for the economy in our latest Czech Economic Outlook here: http://bit.ly/2qgJJdA.
A lower appetite for spending is reflected in retail sales statistics. In our view, September was the weakest month in 3Q18 for retailers, whose sales increased merely 2.7% yoy. However, they added nearly 4% on average in 3Q.
Industrial production slowed further in September as capacity constraints became more pronounced. Mom production was supported by growth in the car manufacturing industry. However, it is suggested by leading indicators that overall industrial production dropped compared with August. Industrial confidence measured by PMI dropped in September to a two-year low. Optimism regarding new orders lowered and increasing wage costs create worries for producers. On the contrary, our outlook suggests that foreign trade got a second wind as it printed a solid surplus of €12.1bn in September due to higher activity in the automotive sector.
Construction also completed the third quarter on a high note by accelerating double-digit yoy growth from August. The construction sector benefits from solid demand from the private sector as well as the realisation of public infrastructural projects.
The lack of an available work force continues to be a problem in the last quarter. In October, the share of unemployed dropped below 3%. At the end of the year, we expect it to grow slightly again due to seasonal effects but not enough to solve the biggest limitations in industry. In to our view, the share of unemployed will shrink below 3% again during the spring months.
Inflation to remain stable, supported by food prices
Prices in October increased 0.5% mom according to our estimates and thus they more than offset September’s drop. Food prices were the main driver as they increased 1.5% mom, in our view, driven mainly by fresh vegetable prices. Fuel prices also contributed to the price level increase as they followed the spike in oil prices at the turn of September and October. Core prices continued their gradual increase, supported by cost pressures from surging wages and increasing prices for other input costs. October’s headline inflation should print 2.3%, the same figure as in September.