Weak value added dampens optimism of stronger GDP growth of 0.7% in late 2024
Economic commentary by Jaromir Šindel, Chief Economist of the CBA
GDP growth picked up to 0.7% in the final quarter of 2024, compared with both the previous quarter (0.6%) and the flash estimate (0.5%). Growth was largely driven by private consumption and inventories. These, together with a slightly positive contribution from (admittedly declining) foreign trade, more than offset the decline in government consumption and the fall in fixed investment.
However, value added, a key component of GDP, stagnated in the fourth quarter. How does it add up? Its stagnation in the fourth quarter, however, took place as product subsidies shrank, and therefore GDP grew more strongly.
Stronger GDP growth implies the possibility of stronger annual growth of around 2.3% this year. However, such growth would require almost twice the growth rate of value added. We therefore see rather limited risk to our GDP growth outlook of 2.1% this year, especially given the risk of higher US tariffs on European goods, especially the aforementioned automobiles.
Stronger GDP growth, despite the stagnation of its value added, represents more of an inflationary risk for the CNB due to stronger household consumption growth (3.2% yoy) and, in turn, accompanied by a 2.4% decline in fixed investment, which may undermine the economy's inflationary potential. If momentum in core inflation remains above 2% annualized growth, this will limit the CNB's appetite to cut interest rates more forcefully despite the need from fixed investment. This may pose a risk to the CBA's median forecast outlook for a further decline in the CNB interest rate to 3.25% later this year from the current 3.75%.
Stronger economic growth in the second half of 2024 provides a positive cushion for this year's outlook
The CSO improved its estimate of economic growth in the final quarter of 2024 by 0.2% point to 0.7% quarter-on-quarter. Growth strengthened slightly following another slight revision of 0.1% point to 0.6% growth in the third quarter and unchanged growth of 0.3% on average over the first half of last year. As a result, annual growth in the economy strengthened to 1.8% y/y at the end of 2024 from 1.4% in the previous quarter. Despite this, economic growth for the full year 2024 remained at 1% after 0.1% y/y growth in 2023.
However, weaker growth in value added has hampered optimism
In contrast to the stronger GDP growth, however, the fourth quarter of 2024 saw its value added stagnate. This followed stronger value-added growth of 0.8% in Q3-2024 but again after weaker growth of 0.1% on average in the first half of 2024. Thus, on average, value-added grew by 0.3% quarter-on-quarter in 2024 compared to average GDP growth of 0.5% (also in contrast to the 1% year-on-year GDP growth in 2024, its value-added grew by 0.3%).
Interpretation of weaker value added growth vs. stronger GDP growth: value added stagnated in Q4, but this was with less subsidies to products, and therefore GDP grew more strongly
GDP is the sum of the value added of sectors such as industry and services, plus so-called taxes on products (since we cannot allocate them between sectors), minus subsidies on products (which we also cannot allocate between sectors). In Q4-2024, there was a quarter-on-quarter decline in subsidies on products of CZK 10 billion in current prices. And since subsidies are subtracted from value added on the way to the GDP total, their quarter-on-quarter decline in Q4-2024 implies a positive contribution to GDP growth of 0.5% points. Thus, GDP growth of +0.7% ≈ stagnant value added + 0.1% point from the increase in taxes on products - (-0.5% point) from the decrease in subsidies on products.
Impact on the economic outlook
Weaker value added growth puts the implications from stronger GDP growth for the outlook for economic growth this year in a slightly different light. This, in the case of the CBA forecast, envisages quarter-on-quarter GDP growth of 0.5% in the first quarter of this year followed by 0.6% growth in the next seven quarters. At first blush, this looks like a conservative estimate, given the average quarter-on-quarter growth of 0.63% of GDP in the second half of 2024. However, if we do not count on another significant drop in product subsidies this year, GDP growth should be closer to the growth of value added, which grew by an average of 0.3% quarter-on-quarter in 2024. The outlook therefore assumes almost double the growth rate of value added this year.
If we graft on the CBA's forecast of quarter-on-quarter economic growth, GDP growth would accelerate to 2.3% in 2025 and 2.4% in 2026, resulting in a 0.2% point stronger economic growth in 2025 than the 2.1% growth assumed in the baseline scenario. Here we assume private consumption growth, a recovery in fixed investment (see, for example, stronger credit demand due to expected investment; see the CNB's credit conditions survey, page 6 here). However, the aforementioned slower growth in value added and the risk of US import tariffs on European imports limit this upside risk to our baseline outlook, in my view.
Demand structure for growth in Q4 2024: stronger private but also government consumption, but also a strong contribution from inventories, a fall in fixed investment and foreign trade
GDP growth picked up in Q4, largely driven by stronger household consumption, which accelerated its growth to 1.5% q-o-q after a revision-improved 0.9% growth in Q3 and weaker average growth of 0.4% in H1 2024 (household consumption declined by 0.1% q-o-q on average in 2023). Household consumption was driven by a rebound in the services segment and still solid consumption in goods.
Despite the approval of a larger government budget deficit (at ₦282bn vs. actual of ₦271bn), government consumption declined by 0.3% in Q4 after stronger average growth of 1.5% in Q2 and Q3 (the revision pointed to a stronger government consumption level of 1% in eQ3).
Fixed investment fell 1.5% q-o-q in Q4 after a weak cumulative increase of 0.8% in the previous two quarters. Moreover, the decline in Q4 would be across segments, with only a slight increase in machinery, which was, however, marginal compared to previous declines. Above that, inventories added 0.3% points to the 0.7% GDP growth, after already adding 0.7% points in the previous quarter.
The decline in fixed investment was compounded by a decline in export activity (-1.5%), but this was accompanied by a slightly stronger decline in imports (-1.8%), which looks like a correction after stronger (2 and 3.6%) gains in the previous quarter.
Supply structure of GDP growth surprised by still positive contribution of manufacturing
Its value added continued to grow by 1% q-o-q in Q4 after a 2% increase in Q3. This is admittedly at odds with the quarter-on-quarter growth in manufacturing output (-1.5%). However, manufacturing posted an average quarter-on-quarter decline of 0.4% in value added in 2024, which is already closer to its average quarter-on-quarter decline of 0.9% in 2024 for its production.
Economic sentiment returned to its December value in February after a decline in January
Its rebound is driven by stronger expectations in industry after its Q4-2024 decline, further recovery in construction and trade after their January declines, and stable sentiment in services, albeit slightly weaker than in Q4-2024. In contrast, consumer confidence has fallen to levels seen last spring.
Note: Unless otherwise stated, we work with seasonally adjusted numbers in the text.
