Czech economy expanded by 0.2% q/q and 1.7% y/y in Q4, according to the flash estimate of the Czech stats office published on Tuesday. The quarterly growth remained unchanged from that reported in Q3 and was below market expectations for 0.6-0.8% q/q increase. The annual growth slowed down from 1.9% y/y in Q3 and was also below analysts’ estimate for 2.3% expansion. It was also below the CNB’s and finance ministry’s projections for 2.1% y/y and 2.2% y/y expansion in Q4. In 2016 the economy expanded by an estimated 2.3% y/y, half the robust 4.6% expansion in 2015, thus again coming below the central bank and finance ministry’s projections for 2.4% and 2.5% increase, respectively.
The stats office said that the economic growth in Q4 was supported mainly by manufacturing, while on the expenditure side, similarly to previous quarters, the robust household consumption and strong external demand continued driving the economic growth. Although not explicitly said, this might mean that fixed investments continued contracting also in Q4, thus preventing more rapid GDP growth. The latter might be reflecting mainly the lower public investments due to the slow drawing of EU funds under the new 2014-2020 programming period and the high comparison base of 2015. At the same time, the private investments are unlikely to have expanded much as according to the CNB’s observations, they are closely linked to public investments and EU funds drawing. Still, private investments might have continued to benefit from the loose monetary policy conditions – the above-average production capacities utilization and narrowing labor market may prompt companies to invest even more. At the same time, growing upward wage pressures to secure qualified staff may limit the companies’ resources for a significant expansion of investments. The assumed lower investments have also reduced investment-related imports, which has allowed for stronger net exports contribution to GDP growth in Q4, in our view.
High-frequency data overall confirm the main drivers of the economic expansion in Q4, but rather speak of some GDP growth acceleration contrary to the stats office estimate. On the supply side, the industrial output growth speeded up to 2.7% y/y on average in October-December with the manufacturing expanding by stronger average of 3.0% y/y, up from 1.6% y/y average increase in July-September. Moreover, the services grew at a stronger pace in Q4, while the construction output contracted by much slower average rate in October-December than in Q3. At the same time, on the expenditure side, retail sales data indicate somewhat slowing down household consumption in Q4, in spite of the fact that the labor market has improved (the stats office estimated that employment has expanded by 2.1% y/y in Q4) and that consumer sentiments are even more upbeat, while foreign demand has supported even stronger exports.
Statisticians also said that the economic growth in 2016 as a whole was mainly driven by household consumption and net exports with the strong domestic and external demand being supportive for most of the industrial sectors, but especially for the manufacturing sector. Yet, the construction sector performed noticeably worse than in 2015.
Both the CNB and the finance ministry have revised their estimates for GDP growth in 2016 – the former to 2.4% (down from 2.8%) and the latter to 2.5% (up from 2.4%). The two institutions also projected GDP growth to have accelerated in Q4 (to 2.1% and 2.2% y/y, respectively) from 1.9% y/y in Q3 — the finance ministry’s projection is 0.5pps higher than stats office flash estimate, while that of the CNB – 0.4pps lower. From monetary policy point of view, the slower Q4 GDP growth may have certain adverse impact on the CNB’s inflation outlook, and hence on the timing of the fx cap exit, especially if the deceleration is driven by slowing down consumption as the latter may be indicative of insufficiently strong domestic demand to sustainably support inflation around the 2% target. Such a development, if coupled with decelerating wage growth (which is overall unlikely given the qualified labor shortages and the narrowing labor market), may potentially make the rate setters await until the middle of the year before even considering terminating the fx commitment. The would be in line with the official communication, but would be at variance with overall expectations that the central bank is to decide on the move rather earlier in Q2 than later (around mid-year) given the accelerating inflation. In the borderline case with household consumption coming much below forecast and wages decelerating, while inflation slowing down again and remaining below the 2% target, the rate-setters may even decide to postpone the move beyond mid-year. Note that this would not come as a big surprise given that central bankers have numerously said the CNB is not in a rush to end its fx commitment, as well as that earlier exit from the weak crown policy bore more risks than a later one.