In Czech Republic industrial output grows by 10.3%

Industrial output grew by 10.3% y/y in July, up from 3.1% y/y in June, according to figures of the statistical office. The result much higher than anticipated, as the consensus put industrial growth at 7.2% y/y in July. This improvement is mostly misleading, however, as industrial growth barely accelerated in calendar-adjusted terms, picking up from 6.6% y/y (wda) in June to 6.7% y/y in July. In addition, industrial output fell by 1.8% m/m (sa), entirely due to manufacturing, where output fell by 2.3% m/m (sa). Considering that manufacturing actually weakened its growth in annual terms when adjusted for calendar effects, from 5.6% y/y in June to 5.0% y/y in July, industrial performance remains problematic. Yet, performance is in line with the manufacturing PMI, which fell by 1.4pts m/m in July and suggests further weakening in August.

Since adjusted data are available only at main sector level, we cannot say exactly where the deceleration in manufacturing growth comes from. After all, there was a calendar effect in the opposite direction in June as well, so non-adjusted data indicate a big recovery. Our estimate points to the automotive sector, which we believe showed a notable slowdown in calendar-adjusted terms, as well as production of all kinds of machinery and equipment, including electoral one. We also have some growth slowdown in various non-metallic production sectors, and an improvement in leather, pharmaceuticals and textile.

Wage growth industry remained extremely robust, up by 9.1% y/y in July. Developments confirm our expectation that wage growth will remain very strong, after nominal wages maintained their growth rate of 8.6% y/y in Q2 and real wages eased growth only because of stronger inflation. Given how labor shortages have persisted, we expect wage growth to remain very strong in 2018 and possibly well over into 2019. Industrial output remains very robust and anecdotal evidence form industry representatives suggests that insufficient personnel is a restraint to expanding production further. To illustrate, the number of employed rose by only 1.3% y/y in July, keeping production capacity behind demand.

New industrial orders improved in non-adjusted terms, from 5.3% y/y in June to 11.2% y/y in July. However, we believe that their growth actually weakened when adjusted for calendar effects, with mostly export orders feeling the pressure. Still, we believe that domestic orders may have eased their growth slightly as well, which is not a good sign, as thus far domestic demand has been mitigating weak economic activity in main trade partners. We believe industrial sales may have improved slightly after adjusted for calendar effects, and they naturally improved heftily when non-adjusted, from a growth of 2.8% y/y in June to 11.3% y/y in July.

Overall, industrial growth remains robust, but there are still signs that its growth may decelerate. Growth level is still very strong, even when adjusted for calendar effects, so overheating concerns will be likely still in play. In addition, signs for the labor market continue to be more than worrying, as wage growth remains out of control. Given still strong domestic demand, we expect that a further slowdown in new export order growth will not have such a big impact on overall industrial performance, at least not in 2018. If the international trade environment remains negative, however, we may observe increasing problems. In addition, a no-deal Brexit scenario will create a major downside risk, since Czech industrial producers work closely with German enterprises that export to the UK, so we expect there to be some second-wave effects in case the UK leaves the EU without a deal.

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