In March, inflation started easing after it hit its peak in February, in our view. However, this should not be a signal for the CNB to not end the FX commitment as we see inflation to continue overshooting the 2% target throughout 2017 and 2018. February data from the real economy are hit by the lower number of working days, but after adjusting for calendar effects, the figures should point to resilient growth of the Czech economy supported by both domestic and external demand.
Czech industrial production surprised in January with a very strong mom advance. This was supported by sound external demand as German industrial production supported by a revival of Chinese demand for German products printed an increase of 2.8%. Domestic car production also increased significantly at the beginning of the year. In February, we expect some correction of mom growth both in the Czech Republic and Germany. Car production also eased, which might be partly due to adjustments at Skoda’s factory related to the Octavia’s facelift. All in all, we expect industrial production to ease 1.2% mom in February. Yoy growth after seasonal adjustment should accelerate to 5.4% after 4.6% in January. However, the calendar effects pushed headline yoy growth to 2.1% after 9.6%, according to our calculation.
The external demand for Czech products remains sound so exports have been growing. But given the increase of import prices, imports have accelerated even more rapidly. Thus we expect the external balance surplus will remain slightly below the figures it printed last year. In February, it should record CZK14.2bn, which is significantly below market expectations but still points to a good external balance.
Construction output dropped in January, which was partly caused by unusually cold weather. In February, the average temperature increased above the long-term average and was located above zero. Thus, we expect an acceleration of construction works. However, in yoy terms, it should still post a decline of 1.1%.
The situation on the labour market has been further tightening. According to ILO methodology, the unemployment rate dropped to 3.5% (SA) in the first two months of 2017. The share of unemployed measured by Labour and Social Affairs Ministry is higher but has been catching up recently. We expect it to decrease to 4.65% on a seasonally adjusted basis, which would move the headline figure to 4.9%. Such low figures should create significant pressure on future wage growth.
The rising purchasing power of households has translated into growth of retail sales, which grew rapidly last year. Although we expect the dynamics will ease slightly this year, retail trade should still post sound growth figures. Our calculations show that, in February, retailers (ex. cars) added only 1.8% yoy, but adjusted for calendar effects their sales increased a strong 5.4%.
Inflation to ease slightly but keep overshooting the target
Inflation will continue overshooting the 2% target. However, we estimate that it peaked in February, when yoy growth of fuel and food prices reached its peak and they are set to ease in the subsequent months. Our forecasts show that inflation will print 2.4%. Slightly lower inflation should not be a signal for the CNB to postpone the expected exit. The March reading will actually corroborate the view of an earlier exit as core inflation (according to our calculation) should record 2.2% in March. Such a high figure means inflation pressures have emerged and price growth is robust. Our long-term forecast suggests that inflation will keep overshooting the target throughout the whole of 2017 and 2018. We thus believe the CNB is ripe to remove the FX commitment in April at one of its Thursday meetings. Given the Easter holidays, the most likely suspects are 6 April and 20 April. However, it is possible the decision will happen on any other April day. We have written more about the CNB at http://bit.ly/CZN0417EN.