Economic sentiment down in Czech Republic in December as business confidence dips

The composite economic sentiment indicator declined by 0.2pts m/m to 99.1 in December, the Czech stats office said on Tuesday. This was the first worsening since June 2016 and was entirely on the back of the worsening of business sentiments that dipped by 0.4pts m/m, while consumer confidence recovered by 0.8pts m/m. Nevertheless, the composite indicator was by 2.6pts higher than in December 2015 despite the fact that sentiments in construction continued deteriorating considerably. The former was broadly expected given the lower public investments co-financed by the EU due to slow start of drawing of EU funds under the new 2014-2020 programming period.

In the business sector, the observed monthly deterioration was broadly-based with the only exception being services where sentiments stagnated m/m. The strongest deterioration of 4.1pts m/m was seen in construction probably to reflect the end of the seasonal works along with the low drawing of EU funds. As statisticians explained, although the assessment of the current economic situation and of the total demand for construction works remained almost unchanged, constructors expect lower activity and employment in next three months, and their expectations for the economic development in the next three months were slightly more downbeat. Sentiments in industry were down by 0.3pts m/m as although industrialists see their current total and foreign demand almost unchanged compared to November, they also assess their stocks of finished goods almost unchanged. The respondents in the industrial sector expect almost no change in their production activity and employment in the next here months, as well as see no change in the general economic situation in the next three months as compared to November. Yet, their expectations for the latter in the next six months are slightly more upbeat. The trade indicator decreased by 1.1pts m/m on slightly lower expectations for economic development in the next three months compared to November.

Consumer confidence indicator increased by 0.8pts m/m was 1.3pts y/y higher. The monthly improvement reflected more upbeat expectations of consumers for the overall economic situation in the next twelve months, which resulted into decreasing share of people intending to save money despite the fact that their worries about their financial situation and about potential rise in unemployment did not change. At the same time, consumers’ concerns about prices’ rise remained almost the same as compared to November. We believe that with inflation picking up to 1.5% y/y in November against the CNB’s projection for 1.0% y/y increase, Q3 household consumption growth hitting the CNB’s forecast and nominal wages increasing by stronger-than-expected 4.5% y/y in Q3, the CNB’s concerns over potentially faltering domestic demand and lack of demand-pull inflationary pressures have been overall dissipated. This has been also confirmed during the Dec 22 monetary policy sitting where the central bank confirmed the termination of the fx commitment continues to be most likely in mid-2017 but would definitely not take place before Q2 2017. Given the above considerations, we see economic sentiment print overall neutral for the CNB’s macroeconomic projections and consequently, for its monetary policy settings.

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