The macroeconomics statistics to be published in April will indicate that the economic dynamics did not slow at the beginning of the year. In contrast, inflation continued easing as it faces several headwinds mainly due to strong adverse base effects.
Despite a moderate decline in car production, February was a successful month for industry. Year-on-year growth will remain above 5%; however, the mom dynamics will decline slightly due to a less optimistic mood of domestic industry and Czech business partners as well as a moderate decrease in car demand.
The construction dynamics, which last time surpassed expectations mainly due to January´s warm weather, will slow again. A cold February combined with ongoing complications related to the start of civil engineering work added to the mom decrease more than 5%, seasonally adjusted. In yoy terms, the construction dynamics slowed from a massive 33.6% to a still very good 7.7%.
Weaker export dynamics will be overbalanced by imports, and thus the external trade balance in February will be nearly CZK10bn lower than a year ago. However, we expect a solid surplus of CZK11.5bn.
According to our forecast, the share of unemployed in March cut two tics and thus reached a new record low. The ongoing Czech economic expansion requires a further increase in employment, but the labour market situation remains very tight and the lack of workers is currently the biggest limitation to production growth in industry.
Consumer confidence continues to reach new record highs as consumers worry less about their financial standing. This is reflected in retail sales dynamics, which in January accelerated to 8.2% without considering auto sales. February is one of the calmer months regarding shopping and thus we expect retails sales to decline 0.1% mom, corresponding to yoy growth of 8.4 %.
Inflation dipping further below 2%
Despite strong figures from the real economy and wage growth acceleration at the turn of the year, Czech inflation remains muted. Strong base effects are pushing core inflation down, while February’s drop in oil prices dampened domestic fuel price inflation. Moreover, food prices eased more than we expected in the first months of the year, creating more downward pressure on headline inflation figures. We expect yoy price growth to cut one more tick in March to 1.7%, while we see a downward risk stemming from stronger food price inflation easing. However, inflationary pressures are accumulating (especially through rapid wage growth and sound domestic demand), and we believe that, in the longer term, inflation will pick up again. In summer, it should return above the 2% mark.