Czechs are gearing up for elections later this month amid buoyant economic growth

Czechs are gearing up for elections later this month amid buoyant economic growth, as businesses struggle to fill vacancies.

Recent data suggests economic activity continued to grow robustly in Q3, after strengthening
in Q2 on the back of a broad-based expansion. In July, growth in both
industrial production and exports accelerated, benefiting from high demand
for motor vehicles, and the latest PMI readings indicate that manufacturing
output increased throughout Q3. The strong economy was also reflected
in improved economic sentiment in September and tightening labor market
conditions, with the unemployment rate hovering near a multi-year low in
recent months and wages increasing at the fastest pace in a decade in
Q2. The results are a testament to the current administration’s successful
management of the economy and will carry some weight in this month’s
elections.

• The economy has shifted into a higher gear and growth is expected to
accelerate this year. It should remain strong in 2018 as fixed investment
benefits from increased inflows of EU funds, household spending expands
on the back of healthy labor market dynamics and external demand
for Czech products remains robust. Furthermore, the outcome of the
parliamentary elections should not change the prudent fiscal approach
taken so far by the current governing coalition, which bodes well for the
future evolution of the public debt. FocusEconomics Consensus Forecast
panelists see GDP growing 3.8% in 2017 and 3.0% in 2018, up 0.2
percentage points from last month’s projection.

• Inflation came in at 2.5% in August, matching July’s result. In late
September, the Central Bank decided to keep the two-week repo rate at
0.25%, although three of the seven Board members voted to hike rates.
Analysts see inflation averaging 2.3% in 2017 and 2.1% in 2018.

CSSD wins, the country’s fiscal stance is likely to remain relatively unchanged.
However, if the CSSD enforced the bank tax proposal contained in the party’s
electoral manifesto—which is not likely—the banking system could face
reduced profits.

Preliminary polls point to a victory for the ANO, followed distantly by the CSSD.
Trailing in the polls are the Communist Party of Bohemia and Moravia (KSCM)
and the liberal-conservative Civic Democratic Party (ODS). Following the
elections, the parliament could be comprised of up to eight different parties,
four of which could be allies of the ANO party. However, Andrej Babis, the
leader of the ANO, may faces challenges in creating a government. Babis,
the former finance minister, has been accused of fraud and some officials
have vowed not to work with him if the accusations are true. Babis claims that
he is innocent and that the charge is politically motivated. The fragmented
political landscape could generate modest uncertainty as parties negotiate
to form a government; this will, however, be similar to past situations, as the
Czech proportional representation system inevitably leads to post-election
consultations, and should not have significant effects on the economy.

The Czech economy is firing on all cylinders, underpinned by solid domestic
and external demand. On the domestic side, household spending is being
supported by rapidly growing wages and extremely tight labor market conditions,
while the inflow of EU funds is buttressing fixed investment. Moreover, the
substantial policy continuity which should follow the elections will make it
possible to reduce the debt to GDP ratio and thus allow the government to
build solid fiscal buffers to face unexpected economic downturns.

The Czech National Bank expects the economy to expand 3.6% in 2017 and
3.2% in 2018. FocusEconomics Consensus Forecast panelists expect the
economy to expand 3.8% in 2017, which is up 0.5 percentage points from last
month’s estimate. For 2018, they project economic growth of 3.0%, which is
up 0.2 percentage points from last month’s projection.

The manufacturing Purchasing Managers’ Index (PMI) produced by IHS Markit
increased from August’s reading of 54.9 points to 56.6 points in September, the
highest level in six months. Consequently, the indicator moved further above
the 50-point threshold which distinguishes expansion in the manufacturing
sector.

September’s reading largely reflected a faster increase in output and new
orders. The stronger rate of growth in new orders came on the back of robust
domestic and foreign order volumes, and pushed businesses to hire more
staff. Despite the larger workforce, the pace of job creation softened as firms
found it harder to find suitable candidates to fill vacancies. Backlogs of work
accordingly increased, and growth in input prices strengthened partly due to
input shortages. This together with solid demand conditions les businesses
to pass higher prices through to final consumers in the form of higher output
prices.

Sian Jones, Economist at IHS Markit, commented that, “Supply constraints
continued to place pressure on cost burdens as shortages pushed raw
material prices up sharply. Furthermore, firms increased their input buying
levels to not only support higher output but also build safety stock.”

FocusEconomics Consensus Forecast participants see fixed investment
expanding 5.1% in 2017, which is up 1.6 percentage points from last month’s
projection. For 2018, panelists expect fixed investment to expand 4.8%, which
is up 0.7 percentage points from last month’s forecast.

Industrial production expanded 3.3% year-on-year in July, up from June’s
3.0% expansion (previously reported: +2.2% year-on-year). The reading
reflected robust growth in the mining and quarrying sector and a jump in
manufacturing—due in large part to higher production of motor vehicles,
trailers and semi-trailers, and machinery and equipment—which more than
offset a significant contraction in the electricity, gas, steam and air conditioning
supply. It should also be noted that July 2017 contained the same number of
working days as the same month of the prior year.

A month-on-month comparison showed that industrial output contracted 9.8%
in seasonally adjusted terms in July, which was a sharper fall than June’s 3.3%
drop. Nevertheless, annual average growth in industrial production increased
from 3.8% in June to 5.2% in July.

FocusEconomics Consensus Forecast panelists expect industrial output to
expand 5.4% in 2017, which is up 0.2 percentage points from last month’s
forecast. For 2018, panelists expect industrial output to expand 4.0%, which
is up 0.1 percentage points from last month’s estimante.

The economic sentiment indicator, a composite confidence indicator published
by the Czech Statistical Office (CSO), improved in September. It rose from the
previous month’s result of 98.7 points to reach 99.1 points. This was on the
back of an improvement in the confidence of both Czech businesses and
consumers.

The business confidence sub-indicator rose from 96.8 points in August to
reach an eight-month high of 97.0 points in September. The reading reflected
improvements in sentiment in three out of the four sectors covered by the
index: industry, construction and services. Meanwhile, confidence in the trade
sector deteriorated.

Consumer confidence also increased in September, rising to 109.2 points from
August’s 107.9 points. In recent years, this indicator has been the standout
confidence indicator in the Czech Republic. September’s increase was
largely driven by better expectations on job security and the overall economic
situation among consumers.

FocusEconomics panelists expect private consumption to expand 3.7% in
2017, which is up 0.5 percentage points from last month’s projection. For
2018, the panel sees private consumption growing 3.2%, which is up 0.2
percentage points from last month’s estimate.

In August, consumer prices decreased 0.1% from the previous month,
contrasting July’s 0.5% increase. According to the Statistical Institute, the
print mainly reflected decreases in the prices of food and non-alcoholic
beverages—especially vegetables—miscellaneous goods and services, and clothing and footwear. These decreases more than outweighed the increase
in prices for recreation and culture, which were supported by higher prices for
package holidays.


Inflation remained steady in August at 2.5%, matching July’s print.
Consequently, inflation remained above the midpoint of the Czech National
Bank’s target range of 1.0%–3.0%. Annual average inflation in August was
2.0%, up from July’s 1.8% and the highest level since August 2013.
The CNB expects inflation to average 2.4% in 2017 and 2.0% in 2018.
FocusEconomics Consensus Forecast panelists forecast that inflation will
average 2.3% in 2017, which is unchanged from last month’s Consensus.
For 2018, panelists expect inflation to be 2.1%, which is unchanged from last
month’s forecast.

Focus Economics