Stronger March sentiment in line with expected consumption-driven economic growth
Economic commentary by Jaromir Šindel, Chief Economist of the CBA
March economic sentiment showed further improvement after a solid February. We are seeing a continued strong rebound in business sentiment, driven by expectations, despite consumers' rather flip-flopping plans for large purchases. Sentiment in industry improved thanks to lower inventories combined with slightly better export expectations.
Meanwhile, March sentiment is in line with the expected recovery of the Czech economy this year, with GDP growth averaging 2.1% yoy. The sectoral view of sentiment is also in line with the expected recovery in GDP driven by domestic consumption. Labour market expectations also do not support the view that the decline in industrial employment will not jeopardise the recovery scenario thus outlined.
Price expectations fell slightly in March (not for consumers) but still not towards the inflation target. This is compounded by a rise in price expectations in the construction sector, which could pose an additional risk to imputed rent in core inflation. But for now, we see this as a temporary monthly distortion due to seasonal adjustment.
We are also seeing stronger business expectations for employment in March. And, unsurprisingly, strongest in construction, less so in manufacturing. This is countered by greater consumer concerns about the labour market. However, these have been lagging in their response to business sentiment in recent years. A further neutralisation of employment expectations in the second quarter is needed to achieve the outlook for a modest rise in registered unemployment to 4.1% this year.
Softer price expectations but strong (perhaps temporary) growth in construction
Price expectations fell slightly, but still not towards the inflation target. Added to this is a rise in price expectations in construction, which could pose an additional risk to imputed rents in core inflation, but for now we see this as a temporary monthly distortion due to seasonal adjustment.
Stronger business employment expectations versus stronger consumer concerns
Employment expectations improved slightly in March, despite stronger consumer concerns about the labour market, which returned to their autumn 2022 level. However, the business sector improved its expectations, especially unsurprisingly in construction, but also in trade and services, but less so in industry. If the business sector maintains its positive sentiment and consumer concerns ease (with the usual lag in recent years), then this could stabilise the unemployment rate. If this neutralisation does not occur until the second half of the year, then it risks a slightly higher unemployment rate than the 4.1% envisaged in our February forecast.
