Monthly indicators from the real economy are set to print sound figures again, proving that the economy is still in good shape as suggested by the forward-looking indicators. However, GDP growth in the last quarter was puzzling as it did not confirm the picture drawn by monthly indicators. We believe the growth structure, which will be released today, will show that weak dynamics were due to inventories while fundamentals remain solid. February inflation is set to accelerate to 2.5% on the back of the base effect of fuel prices and another surge in food prices. Core prices maintain their growth at 2%.
Czech GDP growth remained muted in the second half of the year when it printed only 0.2% qoq growth in the third and fourth quarters of 2016. Yet the monthly activity indicators suggested a much stronger performance (our original estimate was 0.8% qoq). The statistical office (CZSO) has not yet released the growth structure, but its comments suggest that private consumption creates most of the growth. Our models corroborate such a scenario. Foreign demand also acts favourably, according to the CZSO, so we should see an increase in the external trade surplus. The negative surprise thus probably came from investment activity and inventory built. Investment dropped at the beginning of last year and has not yet revived.
We see the lack of preparedness of public investment projects as one of the main reasons. We expect the main drag came from inventory built. This would not be such bad news as a one-off drop in inventories would not point to worsening fundamentals of the Czech economy. We believe that GDP will accelerate strongly in the first quarter of the year as suggested by the monthly indicators.
Industrial production slightly disappointed in December. We believe part of the weakness is due to a higher number of company-wide holidays. PMI and industrial confidence suggest that the industrial sector is in good shape, and we believe January’s figures will confirm this. Yoy growth should accelerate to 7.3% yoy, also supported by a higher number of working days this year. After calendar adjustment, growth recorded 2.3% yoy, according to our estimate.
External demand for Czech goods remains strong. Car registrations in Germany added 10.5% yoy in February, showing that demand for cars still supports Czech exporters in the automotive sector. Also, other parts of external demand remain strong as the growth momentum in the global economy strengthened at the turn of the year. In contrast, increasing commodity prices will dampen the surplus, and they are the main reason for our below-consensus estimate. We believe the positive balance reached CZK14.6bn in January.
Domestic demand also remains sound. The unemployment rate keeps declining as it cut another tick in February, according to our forecast, and it should print 5.2%. The seasonal adjusted measure is thus located at 4.8%, the lowest level since 2008. The shortage of labour supply pushes on wage growth, but the unexpected surge in prices in the last quarter of 2016 probably cut from real wage growth. Nominal wages added 4% yoy while real wages increased only 2.5%, according to our estimate.
The increase in purchasing power is apparent in retail sales dynamics. Our estimates point to a 5.9% increase retail trade ex. cars. The headline figure is helped by a higher number of working days. After adjusting for calendar effects, we expect growth to print 3.4%. Though it is still a solid figure, this represents a slowdown from the high growth dynamics of the past two years.
Inflation to accelerate to 2.5%, increasing the pressure on the floor
Inflation has been rapidly accelerating in recent months. We expect it to print 2.5%, surpassing the CNB’s expectation of 2.1% presented in its February forecast. Thus we expect the inflation figures to exercise even more pressure on the CNB’s bank board to scrap the floor earlier than in mid-2017, and this corroborates our view that the bank board will take this step at its regular monetary policy meeting on 4 May. (For a thorough analysis of our view on CNB policy, see our Czech Economic Outlook, which you can download at bit.ly/CEO1q17EN).
In February, the price level increased 0.4% mom, according to our forecast. The main driver is probably food prices. According to the CZSO monthly survey, the prices of vegetables surged in February. The price growth in this category was confirmed also by inflation readings in Saxony and Bavaria, where statisticians recorded significant growth in prices of food. The yoy growth in food prices in the Czech Republic has already reached 4.6%, according to our estimate. We expect some correction in the coming months, but we believe food prices will remain one of the factors ensuring that inflation overshoots the CNB 2% target throughout this year. Fuel prices added only 0.7% mom in February as they reflected the stabilisation of oil prices on global markets. Yet the statistical base effects pushed yoy fuel price inflation to a high 16.8%. Core prices (according to our definition) eased their growth and added only 0.1% as growth was impeded by a drop in the prices of alcoholic beverages. Yet core inflation remains at 2% yoy. The only drag on headline inflation is administered prices, which remained virtually unchanged in the mom perspective and thus are still printing a yoy decline of 0.2%.