Worse January confidence with still different growth limits across sectors
Economic commentary by Jaromir Šindel, Chief Economist of the CBA
The January survey of confidence in the Czech economy pointed to three factors that can be seen as a rather hawkish signal to the expected CNB interest rate cut.
- Despite better sentiment in industry, it looks like a continued decline in industrial production. The rest of the economy posted weaker but still solid confidence levels in January, which remain above industry.
- Employment expectations are slightly worse, consistent with a continued modest rise in unemployment. However, there is still a noticeable divergence across sectors. This is also reflected in the different (demand vs. supply) nature of the limits to future growth in industry (increasingly insufficient demand) compared to services and construction (shortage of workers and other resources).
- Price expectations did not show a significant change on average in January, but services showed a stronger increase, which may restore the stronger growth momentum of core services in the CPI after their slowdown in December.
January economic sentiment slightly worse
Apart from industry, January brought a deterioration in sentiment in the remaining sectors of the Czech economy. However, its level remains above the long-term average in construction and all sectors, except trade, above industrial sentiment. For the time being, January sentiment remains around the levels recorded in the fourth and second quarters of last year, which could indicate continued economic growth of less than half a per cent quarter-on-quarter at the end of last year.
Industry
The better expectations in the automotive sector do not deviate from the usual volatility over the past year and a half. Moreover, the level of Czech industrial confidence, along with other and foreign sentiment indicators, portends a continued year-on-year decline in industrial production (see the red line in the chart on the right in the first row below). In the case of foreign indicators, the further deterioration in the January German ifo industrial index did not confirm the surprising improvements in the German and euro area PMIs published earlier.
Quarterly survey: continuing divergence between demand and supply factors
The January responses on barriers to growth vary considerably in structure across sectors (chart left). In industry, insufficient demand is becoming an increasing constraint on production. This is despite the still relatively high utilisation of production capacity (see chart above right), which moreover appeared sufficient at the end of last year, a negative message for investment activity. In the services and construction sectors, on the other hand, supply-side factors - such as shortages of staff and materials or equipment - still embody the biggest constraint on growth. The difference between the sectors is even more pronounced when the responses are compared against their long-term average (chart right).
Labour market and prices
Employment expectations remained slightly negative, pointing to a further slight rise in unemployment, but with diverging developments across sectors. Sectoral divergence was also evident in price expectations in January, posing a risk of a re-acceleration of core services price dynamics in the CPI.
