The Czech stats office kept unchanged its Q1 GDP growth refined estimate at 2.9% y/y, same as the flash estimate released the previous month, according to GDP detailed data published today. Economic growth thus speeded up from the 1.9% y/y increase reported in Q4’2016. The quarterly GDP growth of 1.3% appeared same as in the flash estimate and was the fastest quarterly expansion in the last two years, which is indicative of the economy gathering significant expansion pace going forward, in our view. The fact that Q1 GDP growth is well above the CNB’s projections for 2.5% y/y expansion in Q1 may be an indication of a faster monetary tightening potentially warranted. The finance ministry was slightly more downbeat putting Q1 GDP growth at 2.3% y/y.
Detailed data showed that economic expansion in Q1 continued to be driven by final consumption and net exports that contributed positively to the GDP growth in the first quarter of the year. In particular, household consumption rose by the robust 2.8% y/y in Q1, thus contributing, 1.0pp to the GDP expansion in the quarter – similarly to the previous quarter, the household consumption growth was driven by purchases of durable and semi-durable goods, which is indicative of consumers remaining quite upbeat of the future economic development of the country, including unemployment and own financial situation, we think. Despite the fact that the household consumption growth is below the 3.1% y/y increase projected by the CNB, it is quite robust and our view continues to be supported by improvements on the labor market – namely job creation — up by 0.6% q/q and by 1.5% y/y in Q1, statisticians said, and unemployment decline, as well as strong wage growth in view of the narrowing labor market and the increasing labor shortages. Therefore, we do not see the household consumption growth to be of much disappointment to the CNB as we see it indicative of sufficiently strong demand-pull inflationary pressures, thus securing inflation to remain at or around the CNB’s 2% target. Both exports and imports growth accelerated in Q1, but as the former was stronger than the latter (exports growth was driven especially by trade in transport equipment, machinery, and electrical equipment; imports expansion – by sub-deliveries for the automotive industry, manufacture of electrical equipment, and trade in basic metals), net exports had positive contribution to the economic expansion in the quarter – 1.7pps, statisticians said. Given the high investment-intensity of Czech imports, their acceleration in our view reflected mainly the gradually recovering investment activity in the country. Still, investments remained on the negative territory falling by 1.4% y/y in Q1 as gross fixed capital formation declined by 0.6% y/y, with the contraction decelerating from the marked 6.9% y/y drop in Q4’2016 and being much below the projected by the CNB 2.1% y/y fall. The only moderate decline of fixed investments in Q1, given the high comparison base of Q1 2016 when the last EU funds under the previous 2007-2013 programming period were drawn, is overall good news and may be suggesting that the drawing of EU funds under the new 2014-2020 programming period has already gathering pace. The latter, along with the fact that fixed investments expanded by3.6% q//q, may be indicative of their upcoming recovery in the next periods.
GVA growth was slightly slower at 2.5% y/y in Q1, accelerating from 1.6% y/y expansion in Q4 2016, and was 1.3% in quarterly terms. All sectors except for construction reported higher GVA on the year benefiting from strong external and domestic demand. The most vigorous growth was seen in agriculture – up by 8.1% y/y, but it was mainly industry, in particular manufacturing that drove GVA upwards. Statisticians said that GVA in manufacturing, in particular the automotive industry and related industries, contributed the most significantly – 1.1pps, to the annual GVA growth. The renewed production in the chemical industry also contributed to the faster GVA expansion. On the contrary, GVA in construction dropped by 4.9% y/y with the contraction decelerating from 10.8% y/y drop in Q4 2016 – in quarterly terms GVA in construction increased by 3.3% q/q, which may be indicative of construction activity recovery going forward.
From monetary policy point of view, the stronger than projected Q1 GDP growth bodes well with the CNB’s conclusion that the economy is close to its potential and needs certain monetary tightening. Yet, as the central bank has numerously said since it ended its fx commitment on Apr 6, it would welcome the expected crown’s firming to deliver part of the needed monetary tightening before engaging with policy interest rates hikes (currently seen for some time in Q3). For the time being the crown fluctuates only slightly and its strongest appreciation since the CNB ended its fx commitment on Apr 6 against the abandoned EUR/CZK 27 fx cap is 2.4%, much lower than the predicted by markets firming of some 4% in next twelve months after fx cap end, also due to the large crown positions of foreign investors, who counted on realizing significant profits in an unrealized Swiss-like fx cap end scenario. Still, gradual appreciation continues, including due to the renewed real convergence and the forecast may be eventually met. The fact that Q1 GDP growth is stronger than the CNB forecast, the crown has been appreciating only modestly, while inflation is seen to accelerate again above the 2% target driven by upside wage pressures amid narrowing labor market and growing labor shortages, may be indicative that earlier tightening of monetary conditions via interest rates is needed and warranted, in our view. At the same time, the potential need of an earlier rate hike is somewhat offset by the fact that albeit remaining robust, household consumption growth is below the CNB’s estimate for 3.1% y/y expansion. Recall that during the last May 4 monetary policy meeting the rate-setters concluded that if the crown remains weaker than forecasted and fails to deliver part of the needed monetary tightening, while the economy continues to produce inflationary pressures, there might be greater room for interest rate hikes (currently seen to start in Q3 only). Still, central bankers have admitted that it would be better inflation to overshoot the target for some time than to precipitate with rates hikes and be pressed to reverse the move soon afterwards, and have argued that the fact that the CNB ended its fx cap earlier than previously envisaged (around mid-year) required to leave the crown to find its new equilibrium level. Given the above, we therefore see the Q1 GDP data overall neutral to monetary policy and expect the CNB to preserve the key interest rate on the two-week repo operations unchanged at ‘technical zero’ of 0.05% at the Jun 29 monetary policy meeting.