The Czech Statistical Office (CZSO) confirmed that the Czech economy notably accelerated at the beginning of 2017. GDP growth printed 1.3% qoq, which corresponds to 2.9% yoy growth. The structure was not released yet. But our forecasts and comments by the CZSO suggest growth was fueled by increasing activity in industry as well as higher value added in services.
Also on the demand side, the advance was due to several factors. Private consumption remains stable and strong, while an important contribution came also from external demand. This is related to the decent revival of the global economy and especially GDP growth acceleration of the main Czech trading partners. Monthly indicators signaled that the economy is speeding up. The advance in private consumption was indicated by strong retail sales growth, while the increase in industrial production suggested stronger external demand.
Strong growth dynamics will persist for the remainder of 2017. Households will not lose their spending appetite, while we expect a revival of investment activity as infrastructure construction funded by the EU budget should accelerate. Moreover, we expect more government spending. In the autumn, there will likely be a parliamentary election, which will be apparent in public sector expenditures. In particular, wages of public servants should increase. External demand should not weaken either, and exporters will benefit. According to SG economists, the main Czech trading partners should continue to grow.
Strong economic growth induces higher employment. Employment increased another 0.6% qoq (+1.5% yoy). However, there is a shortage of labour force in the Czech Republic. Wages are thus set to grow, and the widening output gap will push up core inflation. The data released today suggest the CNB will be forced to hike interest rates as it will be necessary to tame growing inflation. We expect the first hike in 4Q17, but we see a significant risk of a hike at the August meeting. Thus, the koruna appreciated after today’s reading. Just a few minutes after the release, EUR/CZK moved to 26.4.