The share of unemployed people aged 15-64 inched up to 4.1% in July from 4.0% in June, thus matching market consensus, the labor ministry data published on Tuesday showed. The only marginal increase reflects the gradual inflow of new school graduates and the weak hiring activity of firms during the summer months when companies’ holidays usually take place, but these influences are almost fully compensated by new jobs creation and the peaking seasonal works in construction, forestry and agriculture. The share of unemployed is by 1.3pps lower than in July 2016 when it reached 5.4%. Detailed data showed the number of registered unemployed people increased by 1.9% m/m or by 5,635 people (the first monthly increase in months), to 303,074 people in July, but was still lower by 89,593 people (22.8%) as compared to a year ago. Meanwhile, after decreasing for three consecutive months through December 2016, the number of vacancies increased for a seventh consecutive month albeit at a slower rate of 2.5% m/m (4,566 people) and by 38.5% y/y to 188,066 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. Thus, the number of jobless people competing for one vacancy stagnated m/m at 1.6 in July, but was down from 2.9 a year ago. We believe that the July unemployment print continues to be 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 around the July level until the autumn when somewhat stronger increase may be expected with the massive 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 and the slow if any recruitment in the summer months. 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 on firms. These developments are most likely to translate into higher inflation. Consumer price inflation at 2.3% y/y in June remained above the CNB’s 2% target, but below its monthly forecast (2.6% y/y for both months), and the CNB projects it to accelerate to 2.5% y/y in July, 2.6% y/y in August and 2.7% y/y in September. 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), the rate-setters are not concerned over inflation data and see overall risks to the inflation forecast slightly inflationary as the economy seems to continue to create inflationary pressures, also evidenced by the accelerating core inflation. If nominal wage pressures are too strong and real wage gains are not compensated by the labor productivity growth and the crown’s firming appears lower than expected by the CNB, we may expect the central bank to hike interest rates sooner than indicated (it hiked the basic 2-week repo rate by 20bps to 0.25% last Thursday). Still, it has underlined that the timing of next rate hike – foreseen in the next two years, is dependent on macroeconomic, including crown’s exchange rate developments.