Thursday, December 9, 2010

Czech economy continues its blues

This morning we have received important Czech macro numbers. Inflation in November remained flat at 2.0% y/y compared with October, and final Q3 GDP growth was revised down to 2.8% y/y, from the flash estimate of 3.0% y/y published in November.

Even though inflation was 2.0% y/y in November, unchanged compared with October, the outcome was somewhat higher than generally expected, as consensus including us saw inflation moderating in November. Looking closely at the numbers, the main reason behind for the higher-than-expected outcome was higher food prices. Despite the upside surprise, November’s inflation came out below the Czech central bank’s forecast, which was for inflation to accelerate to 2.1% y/y in November.

Besides inflation, final Q3 GDP and the detailed breakdown of GDP were released. Final Q3 GDP was revised somewhat lower to 2.8% y/y, compared with the flash estimate of 3% y/y. Second quarter GDP growth remained unrevised at 2.4% y/y. Looking at the breakdown of Q3 GDP growth, the economy was driven by the export-orientated manufacturing sector, while private consumption also contributed positively to growth.  Gross fixed capital creation made a strong contribution to growth in Q3, which was expected, but this was primarily due to one-off investments in photovoltaics (solar energy).

Assessment and outlook
Overall, the macro numbers released this morning were neither disappointing nor a positive surprise, which means that our outlook for the Czech economy will not change much going forward. Inflation continues to be subdued, with no demand-pull inflationary pressures emerging any time soon. Furthermore, even though Czech economic activity is reasonable, it is not showing any signs of more robust recovery, especially considering that recent macro numbers (retail sales, industrial production) surprised rather on the downside. Therefore, the Czech central bank will maintain its stance of ‘stable rates for longer’.

Hence, considering that other central banks in the region have already initiated a tightening cycle, such as in Hungary, and the Polish central bank is not far from this either, we expect the Czech koruna to increasingly become a short-term regional funding currency. That said, even though we are looking for further CZK weakness, this is only on a short-term horizon of 3-6 months. In the longer term, we are optimistic for the
prospects of CZK appreciation, as significant fiscal consolidation in the Czech Republic is likely to lead to improving external balances, which will be positive for CZK in the long term.
Full report : Czech economy continues its blues

No comments: