News

Industrial production contracted surprisingly in October

Data on industrial production and external trade came as a disappointment in October. Lower external demand has translated into a decline in output and a lower-than-expected trade surplus. The real economy has therefore entered the final 2016 quarter on a weaker note. However, we assume this is only a temporary slowdown, which is set to be overcome in 2017 at the latest.

Czech industrial production contracted 1.7% yoy in October, falling behind market expectations (+0.5%). At first glance, today’s statistics are disappointing news; in the January-September period, industry posted an average increase of 3%. That said, today’s figure was dragged by several factors. First, the elevated statistical base. Last October, the sector enjoyed high volumes of output; it was the strongest month of the year. Second, production in the automotive industry was lower in October (both in yoy and mom terms), partly due to a fall in foreign demand as shown by new car registrations in the euro area. Third, October 2016 had one less working day. Adjusted for the calendar effects, production rose 0.8% yoy. On the other hand, industry was boosted by a restart of the Kralupy refinery and the Litvínov refinery’s achievement of full capacity. On a month-on-month basis, the sector fell 0.4% (SWDA).

The decline in demand for cars was mirrored in new order statistics, whose value dropped 1.6% yoy. New orders in the automotive sector contracted 1.7% yoy and subtracted 0.7pb from the overall dynamics.

For the whole of 2016, industrial production is set to add 3.7%. Next year, we look for an acceleration to 4.3% thanks to rising investment activity.

The surplus of external trade fell behind expectations in October, reaching CZK 15.5bn. In year-on-year terms, still, the surplus expanded a moderate CZK 0.3bn. There has been an improvement of the deficit in trade with chemicals and mineral fuels in October, likely due to the higher production at Czech refineries. However, statistics for exports and imports came as a disappointment. Exports fell 4.9% yoy due to lower external demand in October, and imports declined 5.3% on the back of low investment activity in the Czech economy. Overall, nevertheless, external trade is heading toward its best result ever; we expect the surplus to reach CZK 500bn according to the cross-border methodology.

Next year is set to deliver positive figures from external trade, too. Exports will be supported by solid external demand, as well as increased investment activity of the Czech Republic’s most important trading partners. On the other hand, imports will be propelled by an increase in investment in domestic activity. We expect the trade surplus will reach CZK 450bn.

Construction output plummeted 8.5% yoy in October, while we looked for “just” a 7.4% decline. Adjusted for the lower number of working days, the sector fell 7.3% yoy. Construction has continued to be dragged by the problematic transformation of EU funds programming periods, which is reflected in the one-fifth drop in engineering construction. Difficulties in administrative processes has hindered building construction. At the time of a record-high increase in flat prices (in the post-crisis period), building construction declined 1.5% yoy. In 2016, the whole sector is set to drop 8.2%. Next year, we expect only a moderate increase of 2%.