In June, Czech industrial output revived significantly faster than expected. Along with that, the trade balance improved above all estimates. The data confirm our forecast of a full-year GDP decline of “only” 5%. On the contrary, the construction sector decline became deeper.
In June, Czech industrial output expanded by a strong 13.4%. The year-on-year decline reached just 11.9% after the previous decline of one-fourth. Without adjusting for the working days’ effect, the yoy decline reached just 7.0 % when analyst estimates including us expected a decline around 11% – 12%.
The main drivers of the decline was still the automotive segment, but its negative contribution declined substantially to -2.8 pp after the previous -8.9 pp. Sectors that grew in yoy terms were above all pharma, manufacturing of wood and the other industries segment.
The year-on-year decline in the number of employees deepened to -3.8%. However, a somewhat positive was the turn of the average wage into positive yoy growth of 0.7% after being negative at -6.8% in the previous month. This might relate to the government Antivirus programme. There is a visible improvement of the external environment on the data. The overall value of new orders was still in a slight yoy decline at 3.4%, which was a big improvement after 36.8% in May. Nevertheless, new orders from abroad returned to slight yoy growth of 0.1%. Domestic new orders were still negative at -10.3%.
The continuing improvement of leading indicators points to further recovery for Czech industrial production. On the other hand, the summer months and this year’s nonstandard holidays will lower the interpretation ability of the incoming data.
The industrial output decline for the whole 2Q was 23% yoy and 18.7% qoq.
We expect industrial production will continue to recover in the second half of this year. Still, for the whole year we expect its decline of 15.2%. For next year, we expect industrial output expansion of 12.2%. The pre-pandemic level should be reached in 2022.
The already-mentioned improvement of external conditions relates to a turn in foreign trade. The balance jumped to a surplus of CZK34.1 bn. This was well above all estimates, which were around CZK7bn on average. While the decline of exports weakened to only 0.4% yoy after the previous -29% yoy, the import improvement slightly slowed to -6.6% yoy after 23.6% yoy in May.
According to our forecast, GDP will be the main drag on the Czech economy this year. But the data from the manufacturing sector and foreign trade released today support our notion that the GDP drop this year will not be as strong as many pessimist forecasts indicated. For this year, we expect the economy to decline around 5%. Nevertheless, that is still a serious decline and will have strong mid-term effects. The data from the construction sector released today showed that some sectors will be hit with a delay. The construction output in June fell deeper to negative territory at -11.5% yoy, which was the worst result from mid-2013. For the construction sector, our forecast reckons with -0.4% for this year and -4.1% for the next year.
The Czech koruna did not react to the new data and awaits today’s CNB meeting.
More information in the attachment.