Monday, December 24, 2007

Merry Xmas and A Happy New Year

Well, a Merry Xmas and a Happy New Year to all my readers. Thank you for taking the time and trouble to pass-by. This blog will now - failing major and surprising new developments in the global economy - be offline till the end of the first week in January, or till after the festival of Los Reyes Magos in Spain (for those of you who know what this is all about). Come to think of it, maybe this is just what our ever hopeful central bankers are in need of even as I write - some surprise presents from the three wise men - but I fear that this year if these worthy gentlemen do somehow show at the next G7 meet, the star in the east which draws them will not be the one described in the traditional texts, but in all likelihood the rising star of India.

Credit crunch, did someone use the expression credit crunch?

Wednesday, December 19, 2007

Czech National Bank Leaves Interest Rates Unchanged

The Czech National Bank left its benchmark interest rate unchanged today as risks to its inflation forecast were judged to remain ``roughly balanced.'' Monetary Policy Board members voted 5-2 to keep the two-week repurchase rate at 3.5 percent, following an increase last month, central bank Governor Zdenek Tuma informed a crowded press conference in Prague today. Two policy makers voted to lift the rate to 3.75 percent.

The Czech Republic's inflation rate reached a six-year high of 5 percent in November, breaching the upper end of the central bank's target range as well as its 3.9 percent forecast for that month. The effect on price growth may be countered by the koruna's 10 percent gain against the euro since July and the possibility of an economic slowdown in the euro-sharing countries.

The board is still ``convinced that faster-than-expected inflation is caused by one-time influences,'' Tuma said. Also, ``there's an impact of the koruna appreciation, with the stronger exchange rate pushing down import prices.''

The currency gains help combat inflation by cutting the price of imports but it also restricts growth by limiting export growth since it makes Czech goods more expensive abroad. The koruna reached a record high on Dec. 10, advancing 5.2 percent against the euro and 14.9 percent against the dollar so far this year.

While the board assessed risks to inflation as ``significant'' in both directions, Tuma said he personally thinks risks are skewed to the upside. That makes a rate increase ``more likely'' than a cut as the next move, he said.

Still, ``should the koruna keep appreciating at a similar pace -- even though I don't find it likely -- it is possible to imagine a different monetary policy reaction,'' Tuma said. He said last month it is unclear whether the next move will be an increase or cut.

Inflationary pressures are mounting in the economy, which is heading for growth of more than 6 percent for a third year. Labor unions may become more successful in seeking higher wages after the unemployment rate reached a record-low of 5.6 percent in November.

Inflation is accelerating much faster than expected, which may drive January's rate to between 5 percent and 6 percent, Tuma said. Still, price growth is spurred by indirect tax increases, rising utility costs and food - factors that are beyond the central bank's reach, and the impact of these factors should fade away soon, Tuma said.

Inflation is being capped by the stronger-than-anticipated koruna and an outlook that growth in the euro-area economy may decelerate more than predicted, the central bank said.

The October ``forecast's main scenario continues to count on a gradual increase in interest rates to ward off a spillover of an inflationary shock to inflation expectations,'' he said. ``A higher risk of the spill-over'' could ``make it problematic to approach our target for 2008 and 2009, let alone for 2010.''

Food costs in the past two months may already have reflected the planned Jan. 1 increase in one of the value-added tax rates, a higher excise tax on cigarettes and introduction of an environmental tax, which could lead to a smaller-than- forecast pickup of consumer prices in January, Tuma said.

Central bankers may raise borrowing costs as early as at their next meeting on Feb 7, but meanwhile Czech borrowing costs remain the lowest among the European Union countries even after four increases this year.

The central bank has also decided to cut the number of its monetary policy meetings to eight from 12, starting next year, with the first session scheduled in February. It will also begin releasing individual votes by the board members and its outlook for rates.

Tuesday, December 11, 2007

Czech Industrial Output October 2007

Czech industrial output grew at an 8.4% rate year-on-year in October, up from 1.2% in September and beating market expectations of 6.0%, mainly due to higher car and electronics production, data released this week by the Czech statistical office (CSU) showed. The figure confirmed consensus expectations for a small rebound in industry after lower-than-expected growth in the previous two months.

Car production jumped 20.3 pct in October, while electronics production grew 15.3 pct. The stats office also said the value of new industrial orders grew 20.5 pct year-on-year, with the bulk of orders coming from foreign buyers.

October construction output also grew 3.5 pct year-on-year, versus a 1.8 pct contraction in September, data which was released separately showed. In addition the planning and building control authorities granted 11 217 building permits, which was down by 18.6% year-on-year. The approximate value of permitted constructions increased by 9.9% year-on-year and reached CZK 32.8 billion.

Monday, December 10, 2007

Czech Inflation November 2007

According to the Czech Statistics Office, the consumer price level in November increased by 0.9% when compared with October. The fast growth in food prices obviously had a strong upward effect on the consumer price level, but there may be more here. The year-on-year rise in consumer prices accelerated to 5.0% in November from 4.0% in October, which is the highest year-on-year price growth since August 2001.

The 0.9% month-on-month increase in the consumer price level had a lot to do with the rise in the ‘food and non-alcoholic beverages‘ component, and the 4.0% increase here was the highest month-on-month price jump in this category since January 1993. The price increase was recorded for majority of kinds of food. The main upward pressure came from the rise in prices of bread and cereals by 11.3%, of which prices of rolls and baguettes rose by 24.6% and prices of bread by 16.2%. Prices of eggs, milk, cheese and other dairy products increased by 12.6%, 2.5%, 7.9% and 3.5%, respectively. Prices of oils and fats rose by 9.4%, of which edible oils by 17.5%, vegetable fats by 9.7% and butter by 6.0%. Prices of vegetables grown for fruit were up by 6.7%. Prices of chocolate and chocolate-based products rose by 4.8%, confectionery without chocolate by 3.2% and confectionery products by 4.5%. Prices of some ingredients, coffee, tea, cocoa and other non-alcoholic beverages went up, too.

The price growth in the 'transport' component was influenced by the increase in prices of automotive fuel by 2.9%, in which prices of diesel oil rose by 6.0% and liquefied petroleum gas (LPG) by 6.2%. Oil prices hit a record high since the beginning of a statistical price monitoring (1969).

But extending beyond the details of the increases, this rise is significant since it means that the Czech central bank may need to continue raising interest rates, following a string of four increases already this year, and indeed central bank Deputy Governor Miroslav Singer has been hinting at just this possibility. The Ceska Narodni Banka's seven-member board last lifted the two- week repurchase rate by a quarter of a percentage point to 3.5% on November 29.

The Central Bank last month raised its two-week repurchase rate by a quarter of a percentage point to 3.5 percent, but at the time of taking this decision policy makers - who target inflation at 3 percent plus or minus a percentage point - had been forecasting November inflation to come in at 3.9 percent. The next meeting of the monetary policy board is on Dec. 19.

Singer is quoted as saying that the "sensitivities" in the bank forecast to the actual inflation registered and to the exchange rate "are more or less known, so the December debate will be substantive". ``What is evident is that the level of restriction will have to be higher, but it's not evident'' how the central bank will ``achieve that'' with interest rates and the exchange rate.

And the problem is no mean one, since it is not clear at this point whether additional increases in the interest rate will serve to slow inflation, or attract more funds which may even cause it to accelerate. A combination of rising rates and a rising koruna make the Czech Republic and ideal "haven" for those playing the currency markets, and in the process (and of course to the extent that the US Federal Reserve and others lower interest rates) the koruna may be about to make the rapid turnaround from being a "carry" currency, to a carried one. Indeed the koruna has been the world's best-performing currency in the second half 2007 and has risen by 10 percent against the euro since July. The currency could, in theory, keep on rising, with significant consequences from the Republic's trade balance in the medium term. Some signs of the creeping issue arriving are to be found in the October trade statistics, since the Czech trade surplus dropped to 8.6 billion koruna, compared with 13.9 billion koruna in September and 3.8 billion koruna a year ago. That is the rate of increase in the balance is slowing, and the balance could at some point turn negative. This is a very worrying prospect, since the Czech Republic had been the most solid one in the whole EU10 group.

And the issue also has broader importance, since the rise in the koruna must to some extent have limited price growth in the short term. That is without the appreciation in the koruna things would have been worse on the inflation front, and this must be taken into consideration when evaluating the consequences of any possible "unwind" at a later date. In the words of Miroslav Singer "the exchange rate is undoubtedly significantly stronger than foreseen by the October forecast, and is much higher than the koruna's trend appreciation,''

Also according to Singer, the last central bank inflation report was "undoubtedly a signal that the level of restriction that we considered adequate" to tame prices may "prove to be insufficient" and "The resulting trajectory'' of interest rates "at this point is not clear'' In this report the Czech national bank forecast that the inflation rate might rise to as much as 6 percent next year, fueled in part by one-time increases in indirect taxes. Also a growing shortage of labor may lead to demands for higher wages and prevent inflation slowing toward the bank's 3 percent target as the impact of the tax increases and rising food and oil prices wanes.

Now the Czech economy grew at an annual 6 % rate in Q3/07, with this growth being principally driven by increases in domestic demand and a continuing strong export performance. Household demand is estimated to be likely to grow at around 6% this year, and investment at around 19%, while government demand is only forecast to grow at around a 1% annual rate.

Now , if we look at the chart below (which was prepared by a staff economist at the Czech National Bank), according to central bank estimates GDP is currently growing at roughly 1 % above its non-inflationary potential, while overall monetary conditions remain broadly neutral. That is to say, inflation is not exclusively a food and fuel price story.

What all this means is that the Czech economy is now moving into tricky territory, with what is known as the output gap - which is really a rule of thumb measure of how fast an economy can grow without producing inflation, since the "gap" in question is a general measure of spare capacity - having turned negative around the end of 2005. So basically the Czech economy is now dependent on inward flows to maintain stability, of funds, and in particular of FDI, to pay for the current account deficit, and inward migration flows of workers to meet the growing labour supply needs.

Labour Shortages?

The lowest unemployment rate in 10 years and a record number of vacant jobs, created by economic growth of more than 6 percent for nine quarters, are increasing chances of demands for rising salaries to be met. Czech real wages rose at the same 5% pace in the third quarter as the preceding three months.

The average gross monthly annual growth, adjusted for inflation, rose 5 percent, while the average nominal wage grew 7.6 percent to 21,470 koruna, led by strong wages pressure in the private sector.

Among private businesses, the monthly salary grew be 7.6 percent, to 21,612 koruna, while salaries for state employee advanced 7.5 percent in the July- September period from a year earlier, to 20,952 koruna. That translates into a 4.9 percent real increase. The largest Czech trade union is now calling for an average 8 percent salary increase next year to cushion workers against measures in the pipeline like increases in value-added tax and cuts in social spending, which will are both likely to undermine purchasing power. The November inflation data will only add more grist to their mill.

The relative position of labour has improved steadily as unemployment falls to decade lows month after month and businesses increasingly have difficulty finding people to hire. Indeed Czech Central Bank Governor Zdenek Tuma has been quite explicit in saying he expects a shortage of labor to fuel wage growth, and hence drive inflation up even more.

"The tension on the labor market is relatively significant'" and `"pressures on wage growth can be expected" told a conference in Prague back in October.

Czechia has one big advantage over many of its East European neighbours in that it has had a positive policy of encouraging migrant workers in place for some time now, and the number of foreigners in the Czech Republic has been rising steadily. Indeed over 34,000 foreigners went to live in the Czech Republic in the first six months of this year, and this compares with 25,000 in the second half of 2006, according to data fromthe Czech Statistical Office.

Data from the Czech police indicate that there were a total of 356,014 foreigners living in the Czech Republic in the first half of this year, compared to 321,456 at the end of 2006. This means that about 34,600 foreigners have arrived in the Czech Republic to stay permanently or temporarily over the past six months. The number of non-nationals living and working in the Czech Republic is still very low when compared with Western European averages, but the figure is rising, and the change in the country's evolution in this sense is very significant. While at the end of 2005 foreigners accounted for 2.5 percent of the Czech Republic's population, by mid 2007 this share had risen to 3.5 percent.

The largest group of foreigners staying in the Czech Republic are Ukrainians. In the first half of 2007, there were 115,000 Ukrainians with permanent residence or temporary stay permits, while three years ago there were 70,500. Ukrainians are also the second largest group of employees who come from abroad, although the largest number are over-the-border workers from neighbouring Slovakia (100,000). In the first half of this year, almost 49,000 Ukrainians were working legally in the Czech Republic legally, but to this should be added many thousands more who are undoubtedly working in the country illegally. (Incidentally, it should be noted that this outflow of Ukrainians to countries across Eastern and Western Europe - and in particular of course to Russia - is now producing large pressure inside the Ukraine labour market, with unemployment dropping steadily, inflation hitting 15.4% in November, and wages and salaries rising at 20% plus a year. So there is not a bottomless pit here anywhere).

Ukrainians also form the biggest group of foreigners with residence permits in Slovakia but, compared to the Czech Republic, their number is low. In the first half of this year, only 630 Ukrainians received residence permits in Slovakia. Again this comparison gives us some idea of just how far out in from on the migrant labour flow question the Czech Republic actually is. All of these countries are suffering the corrosive effect of long run low fertility, and if they are to continue to grow at the rate they are doing they will need to find the labour supply from somewhere.

To give us some idea of just how complex all of this is, it is worth noting that the third largest group of non-nationals working in Czechia come from Poland (22,000) a country with its own labour supply problem (following the mass exodus to the UK and Ireland), a country where labour ministry official recently visited India to scour for construction workers, and where as a short term "urgent" measure convicts have even been released from prison to help build the local highways.

And Poland is not the only EU10 country to start looking farther afield to meet the long term needs which arise from its population shortfall, Skoda has now begun to recruit workers from Vietnam for its factories in the Czech Republic as it struggles with the local labour shortage. Long queues outside the Czech consulate in Hanoi have now become an almost daily sight, provoking some controversy (and even allegations of corruption) both in Vietnam and in the Czech Republic.

This is not the first time that workers from Vietnam have moved to the Czech Republic. When the country was under communist rule as Czechoslovakia, Vietnam, also under communist control, and Cuba sent workers in return for arms and heavy engineering goods. Many of these Vietnamese stayed in Czechoslovakia after the overthrow of communism in 1989 and set up small businesses. Now the Vietnamese are the third-largest migrant worker group in the Czech Republic, behind Ukrainians and Slovaks.

Many Czech companies would now be unable to operate without the foreign labour force, according to HVB Bank analyst Pavel Sobisek. The share of foreign workers in the total labour force already exceeds four percent, and the share of value added created by them is around 3 percent, according to Sobisek. In some sectors, like construction and retail, the share is much higher.