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THINK ING – Macro-economy picture

THINK ING – Macro-economy picture

Market Outlook

We try to keep you posted on how is/will the economy environment in Czech Republic/European Union look like and what will be the key drivers for upcoming period. This update is sourced from ING Bank Research team.


Dec 2020 Edition: Recovery in industry continues

Czech industrial production increased by 3% in October compared to the previous month and the annual figure was positive for the first time since May 2019, mainly driven by a strong recovery in car production ( which grew around 10% in October, thus representing the biggest contributor to this growth). Despite a solid October, however, production is still 16% lower YoY for the whole period of 2020. For the whole of this year, industry should fall by about 7-8%.

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Czech Republic: Household confidence falls in October / Nov Edition.

Household confidence fell sharply in October due to new restrictions because of the second Covid-19 wave. Households are again becoming more concerned about rising unemployment. Overall, household confidence has plummeted to round about the same levels seen in April and May. Unsurprisingly, business confidence fell too in October, especially in services.

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Aug 2020/ The Czech economy contracted by 8.4% quarter-on-quarter, or 10.7% year-on-year, which is an unprecedented fall due to the Covid-19 outbreak. Though slightly better than expected (median consensus: -10.1 QoQ/ -12.3 YoY), the 2Q GDP fall was unprecedented and historically the most severe, which was clear as Covid restrictions fully impacted the economy in 2Q. Analysts’ estimates of the QoQ decline ranged from 6% to 14%, according to a Bloomberg survey. This corresponded to a year-on-year decline from 8 to 16%. In the latest forecast, the Czech National Bank assumed a YoY decline of 11.6%.

Confidence in industry improved/ July 2020: Confidence significantly improved in July, driven mainly by soaring confidence in industry, which rose almost to levels seen before the Covid-19 outbreak. Capacity use in industry increased to 76% (after historically low usage in April of 69%) but this still represents the lowest figure since 2009. Moreover, 50% of companies in industry complain about insufficient demand, which is hindering further growth.

CNB delivered frontloaded easing/ May 2020: As last time, the Czech National Bank delivered a higher-than-expected cut, 75 bp versus 50bp expected by the market. The new central bank forecast sees the Czech economy contracting by 8% this year. The CNB was not specific about preferred tools in the case of rates reaching zero. 

Czech Budget state deficit update/ Apr 2020: Q1 evolution in Czech budget deteriorated and ended with a deficit of CZK45 bn, which belongs to the worst results together with the 2010recession print. The impact of the coronavirus was already slightly visible in the figures and totalled around CZK10 bn. The worst will come in the months ahead.
As such, the negative impact of the Covid-19 outbreak was not realized quickly enough to be visible in the March figures more significantly, but a much stronger impact will come in the next few months. This is the reason why the Government revised the expected deficit from CZK40 bn to CZK200 bn and intensified CZ Government Bonds issuance activity in last weeks.

Czech National Bank review/ Mar 2020: The Czech National Bank cut rates by 75bp today but the total package of measures disappointed. After the latest MinFin comments, the CNB planning on quantitative easing appeared as a done deal. But the CNB indicated it is not on the table now. All this is positive for the koruna but less positive for Czech Government bonds.
Given the reluctance to do QE now, it is likely the CNB will continue cutting rates aggressively, but this is already reflected in the market (the policy rate priced in is around 0.25% in 3 months). Apart from lowering the main interest rate, the CNB reduced further the countercyclical capital buffer (CCyB) rate from 1.75% to 1%, which is effective from April. This should support lending activity of the Czech banking sector to the real economy.

CNB Review/ Feb 2020: Catching the market off the guard. By a narrow majority of 4:3, the Bank Board decided to raise interest rates by 25bps. Indeed, inflation in the new CNB forecast has been revised up. The CNB expects average inflation of 3.2% this year, compared to 2.7% in the previous forecast. The EUR/CZK path remains similar to the previous forecast as well as the interest rate path.

Czech Republic: the unemployment rate increased to 2.9%, up from 2.6% in November on typical winter seasonality. Despite the global slowdown in 2019 the Czech labour market remained tight.


Entire archive of regular analysis on Czech Republic is to be found here.


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