The share of unemployed people aged 15-64 decreased to 3.5% at end-March from 3.7% in February, thus meeting the market expectations and being the lowest since November 1997, the labor ministry data published on Tuesday showed. The further decrease in the unemployment rate reflects the gradually starting seasonal works, but the continued increase in the number of vacancies and decrease in the number of the unemployed confirms our view that the labor market is strongly overheating, thus creating strong upward inflationary pressures via much stronger than equilibrium wage hikes to lure or retain qualified workers. In this regard, the March unemployment rate print is supportive of another standard 25bps rate hike, but only later this year as meanwhile consumer price inflation slowed down to 1.7% y/y in the month. The continued decrease in the unemployment rate continues to reflect the robustly growing economy (by 4.6% in 2017, 5.5% y/y in Q4 alone), thanks to a gradual start of seasonal work in construction, catering, agriculture and tourism, and the strong foreign demand that finds expression of growing orders for local companies’ produce. Yet, the persisting labor shortages have made many companies decline orders, thus gradually turning into a factor hindering stronger export and economic expansion. The share of unemployed is 1.3pps lower than in March 2017 when it reached 4.8%. Detailed data showed the number of registered unemployed people decreased by 6.2% m/m (17,291 people) to 263,608 people at end-March and was lower by 92,504 people (26%) than a year ago. Meanwhile, after decreasing for three consecutive months through December 2016, the number of vacancies increased for the fifteenth consecutive month, at an even stronger pace than in February – by 6% m/m (14,268 people) and by 68% y/y (102,605 people y/y) to 253,522 people at end of the month, a new record-high ever. The latter reflects the fact that employers continue creating new jobs, but also indicates growing obstacles in finding adequately trained workforce, including due to possible skills’ mismatches, in our view. The number of jobless people competing for one vacancy decreased m/m to 1.0 in March and was down from 2.4 a year ago. As mentioned above, the March unemployment print continues to be indicative of labor market overheating on the back of upbeat hiring and expansion plans among employers reflecting the solid performance of the economy, but also due to the increasing labor shortages, and supports the arguments of rate-setters in favor of further tightening of the monetary conditions later this year given the upward wage pressures that it has been and is to continue exerting. Meanwhile, as the growing labor shortages are becoming the major obstacle to faster expansion of companies and the economy, firms might focus on higher investments in modernization of their productions such as automatization and robotization in order to avoid the need of finding new qualified staff, in our view, thus benefiting even stronger private investments, higher competitiveness and growth potential. Moreover, such labor substitution may be expected to result in labor productivity gains, which, at least to some extent, would counterbalance the inflationary impact from the briskly growing wages.
Going forward, we may overall expect the unemployment rate to continue declining with the start of the active season, but the pace of decrease might be quite mild because of the persisting skills mismatch. If the robust economic dynamics is preserved and improves further as expected and vacancies continue increasing, but firms continue facing problems to find adequately trained workforce and the import of foreign workers remains insufficient, we may expect strong upward wage pressures to prevail going forward. This would support even stronger domestic demand, household consumption in particular, but also translate into higher cost pressures on firms. These developments are most likely to translate into higher inflation in the following months and prompt the CNB to increase rates further later this year. Still, the set to continue appreciating crown’s exchange rate, as well as the likely higher productivity gains as firms assumingly are set to focus more on investment in new technologies and innovations in order to substitute the rather expensive or unavailable labor may at least partially offset these inflationary pressures. Overall, the March unemployment print confirms that the labor market is at an extremely good condition and that the upward wage pressures are likely to continue, which would warrant further monetary policy tightening later this year.