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News

Industry and exports are expanding despite the second wave of the pandemic

9.12.2020
Company: Komerční banka, a.s.

Although manufacturing slowed down in October, it has still been growing decently in the second pandemic wave, with strong support from foreign demand. November will probably be weaker but not dramatically. Consequently, foreign demand significantly boosted exports while imports remained weaker. Construction declined at the beginning of the fourth quarter.

In October, Czech industrial production slowed down, growing 3.0% compared to September. After adjusting for the different number of working days, this means year-on-year growth of 1.3%. Excluding calendar effects, this represents a decrease of 1.3% yoy, which was 1.4 percentage points above our estimate and 1.5 points above market expectations. In the case of industry, due to the beginning of the second wave of the pandemic, no significant drop in production was expected as in the case of services. Still, the strong month-on-month increase is a pleasant surprise that was reflected in another high foreign trade surplus.

The biggest driver this time was car production, which grew almost 14% year-on-year. Without car producers, the year-on-year result of industry would have been weaker by as much as 2.6 percentage points, so it would have clearly decreased. In non-automotive sectors, single-digit year-on-year declines still slightly prevailed. The biggest driver downward was energy production and distribution, with a decline of 11.9% yoy and a contribution to year-on-year industrial growth of -1.3 percentage points.

New orders in industry are increasing. Year-on-year growth in their value accelerated by 40 basis points to 5.2% in October, driven by demand from abroad, while domestic orders deepened their year-on-year decline to 1.7%.

The year-on-year decline in employment in industry was 4.1%, as in September and August, but the year-on-year increase in average wages in manufacturing slowed to 2.5% after a previous increase of 4.8%.

Production data for October surprised slightly positively. We expect a weaker figure for November, but it should not be dramatic. Leading indicators are rather mixed. (1) The components of the Purchasing Managers' Index for November point to an expansion of production, albeit at a slower pace. (2) On the contrary, according to the business survey, the confidence in industry declined to a slightly lower level than in March and points to weaker production. (3) The already published growth of German industry in October, together with the high level of leading indicators, indicates a continuing expansion of external demand, which is absolutely crucial for the Czech, export-oriented economy.

In our opinion, the limit for production in the fourth quarter will be mainly the capacity limitations of the supply side. Businesses are better prepared than during the first wave, but there will be a negative impact. Even so, there is hope that industrial production could grow slightly year-on-year in the fourth quarter. The development of foreign demand will be important for further expansion. Given that the vaccine is around the corner and economic policies will continue to expand significantly next year, production could expand further in the coming quarters. However, a number of other uncertainties such as the impact of Brexit still persist.

For this year, we expected a drop in industrial production of around 10%, but recent data show that the result could be rather close to -7%.

Exports are still well ahead of imports

October's foreign trade ended with a surplus of CZK33.4bn. At the same time, the market expected only CZK20.5bn. Total exports were 5.6% yoy higher. Imports still reflect subdued investment activity and the impact of pandemic measures. Imports were down 1.7% yoy. Compared to the previous month, exports grew 4.7% and imports 3.4%. After the excellent result in September, foreign trade brought another positive surprise. The main credit for this went to the balance of motor vehicles, where the surplus was CZK7.7bn yoy higher. A smaller deficit of CZK 4.1 billion in the oil and natural gas balance also helped.

The results of foreign trade show that the situation is significantly better this time than in the first pandemic wave. The automotive industry has not closed its lines and supply chains are functioning better, while foreign demand for cars is solid. On the other hand, investment activity remains low, which dampens the growth rate of imports. The effects of the pandemic will not be avoided by the full-year foreign trade result, but the latest data show that the full-year result is likely to be better than our forecast (CZK76bn).

The construction industry remains subdued

Construction output fell 1.7% mom in October, and its year-on-year decline thus deepened from 8.2% in September to 10.5% in the following months. The effects associated with the second wave of the coronavirus pandemic were already clear on its development. The production of building construction, which includes the construction of all residential and non-residential buildings decreased (13%). High uncertainty about the further development of the pandemic demand for construction work in this segment does not help. The decline in civil engineering was not so deep (-4.8%), probably due to government investments, some of which continue expanding despite the general downturn in the economy.

The outlook for the coming months is not optimistic, as evidenced by a decrease in the number of building permits issued by 7.6% yoy. That was, however, probably also influenced by the limited functioning of offices due to government restrictions.

For the CZK exchange rate, data from the Czech economy published today are another in a series reducing the need for looser monetary policy and thus in favour of a stronger koruna. But the further course of the pandemic will be important.

 

Michal Brožka

Economic and Strategy Research

 

 

Tags: Economics | Finance |

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