December’s figures from the real economy were disappointing. Industrial production dropped 2.2% mom, and its yoy growth printed only 2.7%. The external trade balance even dipped into the red. The only good figures came from the construction sector, which printed its first yoy growth in a year. Despite the slowdown in December, the outlook for the real economy remains sound.
Czech industry erased its November growth when it dipped (after adjusting for calendar effects) 2.2% mom in December. Our calculations show that the manufacturing industry stood behind the decline when especially machinery and car production dropped. Mining and quarrying recorded a significant drop, so only the energy sector impeded the fall in production. In a yoy comparison, industry decelerated to 2.7%. Compared with December 2015, car, energy and plastics production was especially higher.
Despite the slowdown in industrial production, the sector is still able to generate jobs, and wages in the sector are increasing. In December, there were 2.1% more employees in industry yoy and the average wage increased 1.7% yoy. The short-term prospects of the sector remain favourable. New orders increased 9.4% yoy, and forward-looking indicators still suggest acceleration of output in the beginning of the year.
External trade printed a deficit of CZK5bn in December. The balance was dragged down by seasonal factors. Christmas is related to higher consumption, which boosts imports. Moreover, the lower number of working days decreases production and is thus a reason for weaker exports. In a yoy comparison, the surplus of the balance with transport equipment shrank and higher commodity prices also pulled the balance down.
Despite the worse December figure, the trade balance printed a new record-high surplus in 2016. While in 2016 the surplus reached CZK183.9bn, in 2015 it was CZK52.9bn lower. Sound demand for cars in the euro area stays behind a big part of the improvement as domestic producers were able to react. Low commodity prices also contributed notably.
Construction output increased in yoy terms for the first time in 12 months, when it increased 1.9% yoy. While building construction rose 5.1% yoy, output of the engineering sector dropped 6.0% yoy. Yet, the engineering construction showed decent mom growth which might be the first signal of broader recovery in the sector as such. This fact is corroborated by increasing issuance of building permits (+13.5% yoy) and number of dwellings started (+19.9% yoy).
We expect economic activity will accelerate this year. This will support an increase in industrial production and a mild revival in construction. Industry will not be hindered by one-off factors like last year (shutdown of refineries and outages in nuclear power plants). Moreover, the car industry should continue doing well, but the pace of its growth will be slower. The lack of a labour force will be the main impediment for industrial production this year. Despite this, we expect industry to advance 4.4% this year. The trade balance surplus should decrease marginally this year. It will be dragged down by higher commodity prices that make imports more expensive and thus boost the import side of the balance. Imports will also be supported by reviving investment activity and rising domestic consumption. Both these factors will outweigh the effect of growing external demand. Construction will benefit from investment in infrastructure. However, there is still uncertainty about spending on infrastructure. The government has devoted a relatively large sum of money to infrastructure, but we fear it will not be able to tap all of these funds. The construction sector should thus increase 1.7% this year.