The share of unemployed people aged 15-64 decreased to 4.0% in June from 4.1% in May, thus matching market consensus and being at the lowest level since June 1998, the labor ministry data published on Wednesday showed. The decrease is in line with the robust development of the economy and the industrial production, as well as the usual pattern of peaking seasonal works, in particular in construction, forestry and agriculture. The highest share of unemployed of 6.4% was in Usti region (6.6% in May), the lowest at 2.5% — in Plzen. The share of unemployed is by 1.2pps lower than in June 2016 when it reached 5.2%. Detailed data showed the number of registered unemployed people decreased by 3.6% m/m or by 11,082 people, to 297,439 people in June and was lower by 86,561 people (22.5%) as compared to a year ago. Meanwhile, after decreasing for three consecutive months through December 2016, the number of vacancies increased for a sixth month in a row albeit at a slower rate of 5.4% m/m (9,457 people) and by 37.0% y/y to 183,500 people at end of the month, reflecting the fact that employers continue creating new jobs, but also indicating obstacles of finding adequately trained workforce, including due to possible skills’ mismatches. Still, the number of jobless people competing for one vacancy decreased to 1.6 in June from 1.8 in May and was well below the 2.9 a year ago. We believe that the June unemployment print is indicative of overall overheating of the labor market on the back of upbeat hiring and expansion plans among employers reflecting the quite solid performance of the economy, but also due to the increasing labor shortages.
Going forward, we may expect the unemployment rate to remain broadly at the June level until the autumn when some increase may be expected with the influx of new school graduates, especially if their education is inadequate to the labor market needs. A marked decrease in the next months is however unlikely given the reported increasing shortages of skilled labor. If the robust economic dynamics is preserved 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, thus supporting stronger domestic demand, household consumption in particular, but also translating into higher cost pressures in firms. These developments are most likely to translate into inflation acceleration. Consumer price inflation decelerated to 2.3% y/y in June from 2.4% y/y in May, remaining above the CNB’s 2% target, but below its monthly forecast (2.6% y/y for both months). Given the labor market data, as well as the earlier published data on GDP (GDP growth speeded up to 2.9% y/y in Q1 and outstripped the CNB’s forecast) and wages (nominal wage growth speeded up significantly to 5.3% y/y in Q1 and outstripped the central bank’s projections), we do not expect the rate-setters to be concerned over inflation data as the economy seems to continue to create inflationary pressures, also evidenced by the accelerating core inflation. If wage pressures are too strong and are not compensated by the labor productivity growth and the crown’s firming is not sufficient to secure inflation sustainably attaining the CNB’s target, we may expect the CNB to see room for bigger rate hikes and proceed with monetary policy tightening (a 20bps hike of the key interest rate on the two-week repo operations from the current ‘technical zero’ level of 0.05% seems reasonable) already at the Aug 3 monetary policy meeting. In the opposite case, the rate hike can be postponed to the Sep 27 monetary policy meeting, or even to Q4 in view of the hint of such a possibility in the Jun 29 monetary policy meeting Minutes. In any way, the timing of the CNB’s rate hike would largely depend on the crown’s exchange rate developments (regarded as main uncertainty to the forecast) and whether it would preserve its gradual appreciation trend, thus delivering part of the needed monetary policy tightening, or not. The crown’s strongest appreciation since the CNB ended its one-sided fx commitment on Apr 6 was 3.7% against the former EUR/CZK 27 fx cap, and albeit slightly weakening and fluctuating, it is steadily approaching the expected by markets firming of some 4% in the twelve months after the fx cap end.