Thursday, April 24, 2008

OECD Warn The Czech Republic on the Economic Impact of Ageing

The Czech Republic must cut public spending, boost the retirement age and raise health-care co-payments to preserve economic growth, the Organization for Economic Cooperation and Development said in its most recent country survey out today.

The Czech Republic needs to be more ambitious in setting deficit targets while economic growth is at its current high levels, the OECD said in its 2008 country survey. It advised the Cabinet to support health-care and pension overhauls as the country's ageing population may start straining state resources as early as 2012.

The Civic Democrat-led three-party coalition this year introduced a flat income tax and medical fees and limited some social transfers to keep the public-spending shortfall below the European Union's threshold of 3 percent of gross domestic product. It also has plans to revamp the health-care and retirement system, though these may be jeopardized by the coalition's thin majority in Parliament, the OECD warned.

``To maintain these high growth rates, further reforms are necessary,'' OECD Secretary General Angel Gurria said today at a Prague press conference. ``If policy is not changed, spending will increase considerably'' amid a ``rapid pace of aging.''


The OECD urged Czech authorities to consider a ``full liberalization'' of rents, take steps to dscourage early retirements and reduce the length of parental leave to boost workforce supply (really I am not in agreement at all with this latter point, but I will need to find time for a longer post to explain why). It reiterated that tuition for university students is necessary to extend the number of people with higher education.



``Most important is a need to ensure fiscal sustainability through public-finance reform to put the economy in a better shape to cope with population aging,'' the OECD said. ``The current government made a positive start'' with ``a fiscal package that includes wide-ranging tax and spending reforms, many of which are aimed as first steps in more ambitious reform.''




``The recent global financial turmoil has so far not affected the economy, although weaker growth elsewhere may have some impact,'' it said. ``There is little sign of overheating so far; underlying inflation has remained moderate.''


The government earlier this month approved the outlines of an overhaul of the health-care system that includes allowing health insurers to make a profit. The Health Ministry's plan to sell all but one state-financed health insurer is opposed by two smaller coalition parties, however.



``The impact of the second phase of reform could be significant in strengthening competition on the quality and cost of services,'' the OECD said. ``Putting legislation through parliament is an uphill struggle because the coalition itself has a thin majority'' and ``as a result, many of these further reforms are uncertain.''


Concerning a change of the current pay-as-you-go pension system, the OECD recommends that ``mandatory'' transfer of social security payments to private pension funds be adopted rather than implementing the current proposal that would employees to choose between the two systems.

``Providing a permanent choice risks additional public expense because net contributors are likely to switch while net beneficiaries will stay with the full PAYG pension,'' the organization said.


The Czech Republic has dropped the 2010 entry date as a target for euro-adoption and has not set a new date. The government's strategy is to carry out long-term structural changes and allow the economy to close the distance with the richer euro-sharing nations to try and avoid an outcome whereby letting go of the possibility of an appreciating koruna doesn't trigger additional price growth (a problem that may arise in neighbouring Slovakia if the current entry bid is accepted). This government concern is shared by the OECD.

``A consequence of entering the euro area is that, with the loss of the exchange-rate channel, inflation has to do all the work in nominal convergence,'' the OECD said. However, ``delaying entry implies accumulating opportunity costs because it postpones the gains from adopting the euro.''

Wednesday, April 23, 2008

Czech Growth Forecast revised Up

The Czech Finance Ministry has said today that it expects the economy to grow faster than originally expected this year as tax cuts and an inflow of funds from the European Union should boost economic activity. The ministry forecast gross domestic product to expand 4.9 percent, compared with a January estimate of 4.7 percent. It left its prediction for 2009 GDP growth at 5.1 percent. The economy grew a record 6.5percent last year.

The Jan. 1 introduction of a flat rate income tax and measures restricting social and health-care expenses should help ofset a growing shortage of workers and the negative effect the fastest inflation in 10 years on household spending, the ministry said. It raised its forecast for the average inflation rate to 6 percent from 5.5 percent in the previous forecast.

``The Czech Republic will remain a dynamically developing economy, attractive for foreign investors'' and ``the positive effects of fiscal reform and inflow of EU funds will be gradually seen,'' the ministry said. ``Reforms underway will reduce limiting factors and contribute to acceleration of economic growth.''


The Czech Republic may receive as much as 26.7 billion euros ($42.4 billion) from the EU in the period of 2007 to 2013.

The koruna is expected to weaken from the current levels to an average 25.8 against the euro this year before it rises to 25.4 a year later, the ministry estimated. The currency was at 25.052 per euro as of 5:52 p.m. in Prague, compared with 25.045 yesterday.

The unemployment rate will fall to 4.2 percent in 2008 and 3.6 percent in 2009, the ministry said, citing the government's measures adopted on Jan. 1, including a cancellation of automatic indexation of social payments that should prompt people to take a job rather than stay on welfare.



``Reform measures in public finances should lead to higher motivation to work by strengthening net earned incomes at the expense of social benefits, contributing thus to labor market recovery,'' the ministry said.

The current-account deficit is anticipated to represent 3 percent of GDP this year as the economy will generate a record full-year trade surplus of 111 billion koruna, according to the authority. The current-account gap will shrink to 2.1 percent of GDP in 2009, the ministry said.

The Czech budget deficit will continue to narrow to 1.5 percent of GDP this year from 1.6 percent in 2008, the ministry reiterated an estimate from April 21.

Thursday, April 17, 2008

Czech Retail Sales February 2008

Czech retail sales growth accelerated to the fastest pace in four months in February fuelled by increased wages and an extra working day. Sales jumped 6.3 percent from February 2007, following a revised 4 percent increase in January, the Prague-based Czech Statistical Office. When adjusted for the greater number of work days this year than last, retail sales were up 4.5 percent.



Nominal industrial wages rose an annual 13.1 percent in February as the inflation rate reached a decade-high of 7.5 percen, although the central bank expect higher prices to put a brake on household consumption later this year, at least that is one of the key assumptions of the central bank's forecast for inflation to drop to its 3 percent goal in 2009, even without further interest-rate increases.

Policy makers, who raised the benchmark interest rate by a combined 1.25 percentage points over the past 11 months to 3.75 percent, are mulling whether inflation will recede fast enough, thanks in part to the koruna's 15 percent gain against the euro since July, or whether an additional rate increase is necessary to ward off a second-round pickup of inflation.

"There are the first signs of demand-pull inflation. Should signs of faster, adjusted inflation persist or strengthen, it would justify a monetary-policy tightening.''
Deputy Central Bank Governor Miroslav Singer

Monday, April 14, 2008

Czech Republic Producer Prices

Producer prices dropped back slightly in March, rising at an annual 5.3% versus the 5.6% registered in February. This is now the second month they have fallen on an annual basis, since in February they were down from the 6% high registered in January.



In March 2008, compared to the previous month, prices of agricultural and industrial producers were up by 1.2% and 0.3%, respectively; prices of construction work and market services grew by 0.5% and 1.4%, respectively.

Industrial producer prices rose by 0.3% (+0.1% in February). The growth of the price level was the most markedly influenced by higher prices of ‘coke, refined petroleum products’ (+3.7%), ‘basic metals and fabricated metal products’ and ‘chemicals, chemical products and man-made fibres’ (+0.6% both). The most significant drop of prices came in ‘food products, beverages and tobacco’ (-0.3%) after successive eleven months of growth. Of these the highest decreases were recorded for the prices of ‘dairy products and ice cream’ (-2.0%), ‘meat and meat products’ (-0.4%) and ‘other food products’ (-0.1%). Prices went down markedly in ‘coal and lignite; peat; crude petroleum’ (-1.2%), ‘wood and products of wood and cork’ (-1.0%) and ‘other manufactured goods n.e.c.’ (-0.9%).

Industrial producer prices grew by 5.3% (+5.6% in February). The price level was influenced most significantly by prices of ‘food products, beverages and tobacco’ which rose by 10.8%, of which prices of ‘dairy products and ice cream’ were up by 17.3%, ‘prepared animal feed’ by 35.6% and ‘other food products’ by 8.6%. Prices of ‘coke, refined petroleum products’ increased by 26.5% and prices of ‘electrical energy, gas, steam and water’ by 9.3%. Prices went down y-o-y particularly in ‘transport equipment’ (-4.0%), of which particularly ‘parts and accessories for motor vehicles and their engines’ (-7.2%). Prices of ‘rubber and plastic products’ dropped by 2.3% and prices of ‘wood and products of wood and cork’ by 2.9% (-1.0% in February), of which ‘wood, sawn, planed or impregnated’ by 13.0%.

Export Prices

In February 2008, export prices decreased by 1.0%, import prices by 1.1%, month-on-month. Year-on-year, export prices fell by 5.0% and import prices by 3.3%. The terms of trade figures reached 100,1%, m-o-m, and 98.2%, y-o-y.



Exports: following the slight month on month growth recorder in January, export prices recovered their downward trend in February and dropped by 1.0%, especially due to the strong appreciation of the koruna. The drop of the total m-o-m export price index came mainly from a 0.9% decrease in prices of 'machinery and transport equipment’ (particularly road vehicles) and 'manufactured goods classified chiefly by material’ by 1.6%. Among other sections important in terms of weight, decreases were recorded for ‘chemicals and related products’ by 1.6%, ‘miscellaneous manufactured articles’ by 1.3% and ‘crude materials, inedible, except fuels’ by 1.2%. Price growth was registered only for 'mineral fuels, lubricants and related materials’ by 1.3%.

Friday, April 11, 2008

Czech Industrial and Construction Output February 2008

Czech industrial output grew 11.3 percent year-on-year in February, compared to 9.3 percent in January and against market expectations of 8.0 percent, data released by the Czech statistical office (CSU) showed.




The average number of persons employed in industry went up by 2.5% year-on-year in February 2008 (+28.6 thousand persons). Increases in average number of persons employed were registered in ‘manufacture of rubber and plastic products’ (+10.0%), ‘manufacture of transport equipment’ (+7.4%) and ‘manufacture of machinery and equipment’ (+6.6%).

Employment decreased most in 'electricity, gas and water supply' (-10.4%), ‘manufacture of textiles and textile products’ (-6.8%) and ‘manufacture of leather and leather products’ (-3.2%).

The average monthly nominal wage in industry rose by 13.1% year-on-year and amounted to CZK 21 248. The average hourly wage increased by 6.4% and stood at CZK 145.4. Labour productivity in industry grew by 7.4% and hourly labour productivity by 1.8%.



Industrial new orders in selected CZ-NACE activities concluded in February 2008 reached the value of CZK 162.7 billion (current prices), of which non-domestic industrial new orders made up CZK 104.3 billion. The y-o-y index of industrial new orders in total stood at 104.4%, the index of non-domestic industrial new orders was 98.6%. Non-domestic industrial new orders grew most in ‘manufacture of radio, television and communication equipment and apparatus’ (+43.4%, contribution to the growth of industry in total 2.8 percentage points), ‘manufacture of machinery and equipment‘ (+11.3%, contribution 1.5 p.p.) and ‘manufacture of electrical machinery and apparatus’ (+15.5%, contribution 1.5 p.p.). Non-domestic industrial new orders dropped in 'manufacture of motor vehicles, trailers and semi-trailers' (-7.5%, contribution -2.4 percentage points), ‘manufacture of office machinery and computers’ (-39.2%, contribution -2.1 p.p.) and ‘manufacture of basic metals‘ (-13.8%, contribution -1.2 percentage points).


Construction Output


February construction output grew 11.5 percent year-on-year, versus 1.0 percent growth in January, separate data from the statistics office showed this maorning. In February 2008 seasonally adjusted total construction output at constant prices was up by 2.4%, compared with January 2008. In comparison to February 2007, output at constant prices grew by 11.5%. The planning and building control authorities granted 8 608 building permits, i.e. by 5.5% more year-on-year. Approximate value of permitted constructions increased by 16.5% year-on-year and reached CZK 29.3 billion. Seasonally adjusted total construction output at constant prices grew by 2.4% month-on-month. The trend increased by 0.7% month-on-month .





Total construction output at constant prices increased by 11.5% year-on-year, working days adjusted (WDA) total output grew by 10.3% (February 2008 had one working day more). Civil engineering recorded a high year-on-year growth of construction output in new construction, reconstruction and modernisation, and in repair and maintenance as well. This was due to financially demanding construction of roads and highways including their reconstruction and modernisation. In comparison to February 2007 civil engineering output moderately increased. Construction work abroad dropped for the first time in the period exceeding one year.

Approximate value of constructions permitted in February 2008 increased by 16.5% in comparison to February 2007 and reached CZK 29.3 billion. New construction is valued at CZK 21.0 billion (up by 18.8%, contribution 13.2 p.p.). Renewals and enhancements will make available constructions worth CZK 8.3 billion (up by 11.1%, contribution 3.3 p.p.). Approximate value of new construction was differentiated by type of constructions. The highest growth was registered for non-residential buildings (by 56.6%, contribution 11.7 p.p.) and residential buildings (by 27.0%, contribution 5.6 p.p.). The approximate value of environmental constructions and other constructions remained constant and fell year-on-year, respectively. Approximate value of renewals and enhancements grew in non-residential buildings (by 31.4%, contribution 3.6 p.p.) and in other constructions (by 13.9%, contribution 1.2 p.p.).

The number of employees in construction enterprises with 20+ employees rose by 0.7%*) against February 2007. The average monthly nominal wage of employees increased by 16.7% year-on-year and reached CZK 20 859 (real wage increased by 8.6%). The average hourly wage grew by 6.7% year-on-year and stood at CZK 145. Labour productivity per employee increased by 10.1% and labour productivity per hour worked grew by 0.7%.

Wednesday, April 09, 2008

Inflation-Free Growth Capacity In The Czech Republic

Can you get too much of a good thing? Normally we like to think we can't, but in practice we always can. Take economic growth. If we don't get enough of it we have increasing unemployment, we can't pay our health and pension systems, and people generally aren't too happy. But if we get too much of it, we spark off inflation, we become uncompetitive, people stop lending us money, and then all that wonderful growth comes grinding to a halt. The thing is, do we have a "happy mean", and how do we find it. This is normally what people call inflation-free, low unemployment optimal growth, and most of us would give our right hands to find the secret of this. Especially if we happened to be living right now in the Czech Republic, and doubly so if we just happened to be working for the central bank there.

Basically the Czech's have a decision problem, and it isn't an easy one to address. Their economy grew in the fourth quarter of 2007 at what was effectively the fastest pace in two years on the back of increased demand for consumer products and higher public spending on health care and construction works. Gross domestic product expanded year by 6.6 percent year on year during the quater, which compares with a revised 6.3 percent achieved during the third quarter.





And over whole year 2007 the Czech economy grew by a whopping 6.5 percent, following on the back of pretty strong performances in 2005 (6.5%) and 2006 (6.4%).



All of this is evidently very good news, since 6 percent plus growth over a three year period is nothing to be sniffed at, but, on the other hand, if we start to take a bit closer look at some of the data we have seen coming out of the Czech Republic in recent months, and in particular at the data for inflation, wages, and unemployment, we may begin to ask ourselves just how long this particular show can continue, and indeed we may just want to resurrect for ourselves that thorny old chestnut of a question: just what is the inflation-neutral sustainable growth rate for a country with the profile of the Czech Republic?


Inflation Under or Out-of Control?


So let's start with inflation, which dropped back slightly in March for the first time since last July, led by slowing growth in the cost of food and holiday packages. The Czech Republic's annual inflation rate fell to 7.1 percent in March from 7.5 percent in February, when it touched its highest level in a decade, according to data from the Prague-based statistics office earlier today. In fact consumer prices actually fell 0.1 percent from February, when they gained a monthly 0.3 percent over January.



In particular food prices fell back 0.3 percent in the month although they were still 10.8 percent higher than a year earlier. Costs of packaged holidays also fell, by 2.7 percent in the month.

Clearly, despite the fact that the rate of price inflation eased back slightly last month, inflation is still far too high, and there is no real guarantee that it will continue to move down rather than head on up again, unless the economy slows considerably, and this idea of slowing growth is one eventuality that is none to popular with the Czech government or even over at the central bank. So what are the alternatives. Well one restraint on price growth could be the continuing rise in the value of the koruna, which has risen 12 percent gain against the euro since January 2007.

But there are disadvantages to rising currency values, in particular since the impact on export prices may not be that different from actually having the inflation itself, and at the present moment in time the Czech economy is having a pretty successful run of it being an export economy.




And there are also structural dangers involved in letting the koruna rise too far, since in the fisrt place this would attract even more funds to lend to households to fuel consumer demand and construction activity, whilst at the same time weakening the country's burgeoning industrial base. Slowing economic growth - as a result of string of five rate increases from the central bank from the middle of last year - and the waning effect of Jan. 1 tax and regulated price increases are also hoped to have some effect. Indeed it was the combination of these three arguments that lead rate setters at the Czech central banlk to refrain from raising what is still Europe's second-lowest benchmark interest rate last month after raising it to a six-year high of 3.75 percent in February.




The central bank's revised February inflation forecast anticipates an inflation rate of 5.3 percent during the fourth quarter of this year and a 2.4 percent rate by the second quarter of 2009. The preferred mid-point of the central bank's inflation objective is 3 percent. Inflation breached the bank's 4 percent ceiling for a fifth month in a row in March due to the global growth in food and oil costs and a jump of indirect taxes and state-controlled prices such as rents and energy. Policy makers however are inclined to place more emphasis on so-called second-round effects of cost price shocks and tax adjustments such as elevated wage-growth demands that could thwart inflation's return to the desired level.

Indeed this is the interpretation placed on the situation by Czech National Bank board member Eva Zamrazilova speaking at a central bank conference in Prague this morning:

"The data show that the current surge of the inflation rate will be limited by time, the situation will gradually calm down and in early next year, inflation will return to levels very close to our target," she said "Today's figure fully corresponds with an outlook of stable interest rates in the near term"


Things may, however, turn out not to be quite so neat and tidy.

It is true that wage inflation has been slowing, and Czech real wage growth slowed the most in two years in the last quarter of 2007 even as inflation accelerated. The average monthly paycheck rose 1.9 percent when adjusted for inflation, compared with growth of a revised 4.9 percent for the preceding three-month period. The average gross monthly salary advanced 6.8 percent to 23,435 koruna ($1,435). For whole year 2007, real wages were up 4.4 percent, the fastest rate of increase in four years.




Employment and Unemployment


The Czech unemployment rate, on the other hand continues its historic descent, and fell again to 5.6 percent in March as sustained economic growth continued to create more jobs. The rate was down from the 5.9 percent registered in February.




As a result the number of registered unemployed dropped to 336,297, down 18,736 from the preceding month and down 94,177 from a year ago, according to data from the Czech Labor and Social Affairs Ministry earlier this week.



And employment has also been rising rapidly, with the number of first (main) jobholders in Q4 2007 reaching 4 967.3 thousand, up by 105.6 thousand (+2.2%) year-on-year. Employment thus reached it highest level since the start of 1997.


One evident consequence of this steady increase in employment and decline in unemployment is that labour shortages are now a growing reality in the Czech Republic, and one clear indication of this is the fact that the number of unfilled job vacancies is also steadily increasing, hitting a record 151,311 at the end of last month.




So with the Czech economy creating jobs at a rate of over 100,000 a year, and with unemployment falling at 95,000 a year, and realistically assuming that not all the 300,000 or so unemployed who remain are employable, then the Czech Republic may be what, 18 months or so away from running out of workers at this point. Of course, long before you actually get to run out of workers, you hit the limits of the inflation-free rate of growth which is possible with the workforce which remains, as we have been seeing in one East European economy after another, (and as we may now even be seeing in China). This is why the recent surge in Czech inflation, despite the slight fall back this month, should be giving some cause for concern over at the central bank.

And the situation is in fact even more complicated than these numbers reveal, since if we look at the chart below, which shows a breakdown of the Czech 2007 population by five-year age groups, then we can see that the largest cohort is now in the 30 to 34 age group, and after this each subsequent group has less people coming up behind them. Worse, the 55 to 59 age cohort is significantly larger than either the 15 to 19 one or the 20 to 24 one, which means that as people retire there will increasingly be less people entering the labour market to replace them, and especially since the tendency is for young people to spend an increasing number of years in training and education.



The root of the problem here is long term fertility, which only really crashed to very low levels in the 1990s, but which has, as can be seen in the chart, been hovering nervously below the replacement level since the late 1960s (with some ups and downs).


The result of this is the number of children being born has been dropping back continuously since the mid 1970s, and it is this process more than anything else which gives the current Czech population structure its very peculiar present shape.





So Is Migration The Answer?

Certainly migration can help (as can increasing participation rates among older workers) but the numbers involved are really quite large for a comparatively small country, and there are issues about preparedness to adapt to becoming a multi-cultural society (everything in Eastern Europe is just happening so quickly). The changeover is, however, taking place and foreigners now make up almost 4 percent of the Czech Republic's population (which is currently a little over 10 million), with the number of migrant workers in the country rising steadily year by year, and in particular in 2007. According to data from the Czech Statistical Office at the end of last year there were a total of 392,100 foreigners with long-term or permanent residence permits living in the Czech Republic. This was up by 70,600 in 2007 alone.



The largest group of foreign migrants with rights to work in the Czech Republic comes from Slovakia. At the end of last year, 101,233 Slovakians were legally worrking in the country. Ukranians are the second most numerous group with 61,592 working in the Czech Republic last year. The number Mongolian and Vietnamese workers is also increasing rapidly. In 2007 there were 6,897 Mongolians working legally in the CR (up from 2814 in 2006) and 5,4425 Vietnamese (up from 692 in 2006). The numbers of Vietnamese actually in the country is undoubtedly much larger, and according to the Czech police, there are almost 51,000 Vietnamese holding long-term or permanent residence permits for the CR, many of them with temporary student visas. Demand in Vietnam is also way up, and the Czech embassy in Hanoi had to close its doors to visa applicants temporarily in March to reorganise itself in order to cope with the influx.


It is evident that the Czech Republic's labour shortages are now making their present felt across the economy as a whole, and the world of business is now waking up to the implications of this situation. Bloomberg had an in-depth article earlier in the week, where they quoted Jiri Cerny, vice president of Toyot and PSA Peugeot Citroen's joint venture in the Czech Republic, as saying that three years after opening shop in the country he feels it is getting harder by the day to find workers, as a result he is now actively considering importing them from Mongolia.

TPCA, the Toyota-Peugeot joint venture about an hour outside of Prague, shows the strains created by this new investment. Along with average wage growth of more than 40 percent since the Czech Republic joined the EU in 2004, managers like Cerny also face a labor shortage that means they can't recruit all the workers they need just by offering higher pay.

"It's difficult; we are always looking for employees," says Cerny, wearing the plant's trademark gray overalls as he bounces between budget meetings and the factory floor. To find qualified workers, "we're thinking about Vietnam right now, as well as Mongolia," he says.


This story is being repeated in one country after another across Eastern Europe as companies that were attracted by the promise of cheap and plentiful labor are finding less of both, as faster growth drives up wages and open borders encourage emigration. Indeed there is increasing speculation that accelerating inflation may cause eastern Europe's investment- led boom to fizzle (and possibly even crash to a dead stop), with the Baltics and Balkans regions already threatened by a "hard landing" according to the International Monetary Fund and Standard & Poor's.

Of course in the short term migration will undoubtedly help, but in the longer run sustainability is going to be all about getting that fertility rate back up again, at least to something approaching replacement level, otherwise "catch up" economic growth will be simply unsustainable, while the pension and health systems will buckle under the weight of the large elderly population.


Update Thursday 10 April 2008


Development since I wrote this post only serve to confirm just how complex all of this is now becoming. This morning Czech central bank Governor Zdenek Tuma has an interview in the magazine HVG. He exxplaines in the interview that Czech monetary policy makers have kept interest rates down as low as possible in order to try to avoid excessive strengthening of the Korune. The central bank, which last met on March 26 and kept the 14-day repurchase rate at 3.75 percent, expects the inflation rate to fall to 5 percent by September and 3 percent next year from 7.5 percent in February, Tuma told the Budapest-based magazine.

``The low interest rate-level isn't surprising when you look at the past few months,'' he said in the interview published today. ``When an economy is catching up to a more advanced region, its national currency usually appreciates. That's what's happening in the Czech Republic.''


At the same time the Czech Cabinet have approved this week an agreement with the central bank designed to avoid putting more pressure on the koruna, so that it does not start weighing excessively on exports. The plan, submitted by Finance Minister Miroslav Kalousek, was passed by ministers at a weekly meeting in Prague yesterdat, reviving a similar arrangement made in 2002.

The objective is to keep the foreign-currency proceeds from state asset sales and European Union funds off the market to limit demand for the koruna. The plan is the result of an ``agreement with the Czech central bank on a series of measures which should work against the trend of the appreciating koruna,'' Kalousek told reporters.

The Czech government plans to sell state assets such as the national airline Ceske Aerolinie AS as early as this year. The government also wants to sell Lestiste Praha AS, operator of Prague's international airport, which could generate as much as 100 billion koruna ($6.3 billion). Kalousek said revenue from sales of state assets will be frozen on a foreign exchange account at the central bank and kept for an overhaul of the pension system. If the government needs part of the funds, it would use foreign exchange swaps until it adopts the euro in the future, he added.

If the Finance Ministry was to issue Eurobonds then ``we will hedge them so they have no impact on exchange rate developments.''


This is a reference to a ministry statement last December that it may sell euro-denominated debt this year with a value equal to no more than 50 percent of its annual borrowing needs of 180 billion koruna, depending on market conditions.

The Czechs are also entitled to receive as much as 26.7 billion euros ($42.1 billion) in EU funds during the period of 2007 to 2013. Kalousek said he is not in favour of hedging funds coming from the European Union as that would contribute to koruna appreciation and would weigh on exporters.

It ``would mean a transfer of all of the negative impacts on Czech exporters,'' he said. ``Both the public and private sectors must share exchange rate risks.''

Tuesday, April 08, 2008

Czech Trade Surplus February 2008

The Czech trade surplus swelled in February to the largest in 11 months as exporters withstood the effect of the appreciating currency. The positive balance reached 14.3 billion koruna ($893.6 million) after January's 12.2 billion koruna and 12.9 billion koruna in February 2007, the Prague-based statistics office said earlier today.




February exports amounted to 215 billion koruna, increasing 11.4 percent from the same month of last year and led by vehicles and machines. Imports totaled 200.8 billion koruna, up 11.5 percent from a year earlier.




Czech monetary policy makers refrained from raising borrowing costs in March over concerns about the strong koruna and the prospect of a sluggish economy in the euro area will contain inflation and curb local economic expansion.

Czech Inflation March 2008

The Czech Republic's March inflation dropped back slightly in March for the first time since last July, led by slowing growth in the cost of food and holiday packages. The annual inflation rate fell to 7.1 percent from 7.5 percent in February, when it was the highest in a decade, according to data from the Prague-based statistics office earlier today. Consumer prices fell 0.1 percent from February, when they gained a monthly 0.3 percent.



Prices of food fell 0.3 percent in the month and were 10.8 percent higher than a year earlier. Costs of packaged holidays fell 2.7 percent in the month.

Price growth is expected to be contained to some extent by the koruna's 12 percent gain against the euro so far this year.




Slowing economic growth and the waning effect of Jan. 1 tax and regulated price increases are also hoped to have an effect. It was these arguments that lead rate setters to refrain from lifting Europe's second-lowest benchmark interest rate last month after raising it to a six-year high of 3.75 percent in February.




The central bank's February forecast anticipates an inflation rate of 5.3 percent in the fourth quarter and a 2.4 percent rate in the second quarter of 2009. The preferred mid-point of the central bank's inflation objective is 3 percent. Inflation breached the bank's 4 percent ceiling for a fifth month in a row in March due to the global growth in food and oil costs and a jump of indirect taxes and state-controlled prices such as rents and energy. Policy makers however are inclined to place more emphasis on the so-called second-round effects of cost price shocks and tax adjustments such as elevated wage-growth demands that could thwart inflation's return to the desired level.

Indeed this is the interpretation placed on the situation by Czech National Bank board member Eva Zamrazilova speaking at a central bank conference in Prague this morning:


"The data show that the current surge of the inflation rate will be limited by time, the situation will gradually calm down and in early next year, inflation will return to levels very close to our target," she said "Today's figure fully corresponds with an outlook of stable interest rates in the near term"


Things may however not be quite so neat and tidy.

True wage inflation has been slowing, and Czech real wage growth slowed the most in two years in the last quarter of 2007 even as inflation accelerated. The average monthly paycheck rose 1.9 percent when adjusted for inflation, compared with growth of a revised 4.9 percent for the preceding three-month period. The average gross monthly salary advanced 6.8 percent to 23,435 koruna ($1,435). For whole year 2007, real wages were up 4.4 percent, the fastest rate of increase in four years.

Czech Unemployment March 2008 and the Need For Migrant Workers

The Czech unemployment rate fell to 5.6 percent in March as sustained economic growth continued to create more jobs. The rate fell from 5.9 percent in February.




The number of registered unemployed dropped to 336,297, down 18,736 from the preceding month and down 94,177 from a year ago, according to data from the Labor and Social Affairs Ministry this week.




Labour shortages are growing with the number of job vacancies increasing to a record 151,311 at the end of last month.



And employment has also been rising rapidly, with the number of first (main) jobholders in Q4 2007 reaching 4 967.3 thousand, up by 105.6 thousand (+2.2%) year-on-year. Employment thus reached it highest level since the start of 1997.



So with the Czech economy creating jobs at a rate of over 100,000 a year, and with unemployment falling at 95,000 a year, and realistically assuming that not all the 300,000 or so unemployed who remain are employable, then the Czech Republic may be what, 18 months or so away from running out of workers at this point. Of course, long before you actually get to run out of workers, you hit the limits of the inflation-free rate of growth which is possible with the workforce which remains, as we have been seeing in one East European economy after another, (and as we may now even be seeing in China). This is why the recent surge in Czech inflation, despite the slight fall back this month, should be giving cause for concern over at the central bank.


Is Migration The Answer?

Certainly migration can help (as can increasing participation rates among older workers) but the numbers involved are really quite large for a comparatively small country, and there are issues about preparedness to adapt to becoming a multi-cultural society (everything in Eastern Europe is just happening so quickly). But the change is taking place and foreigners now make up almost 4 percent of the Czech Republic's population (which is currently a little over 10 million), and the number of migrant workers in the country has been rising steadily year by year in recent years, and in particular in 2007. According to data from the Czech Statistical Office at the end of last year there were a total of 392,100 foreigners with long-term or permanent residence permits living in the Czech Republic. This was up by 70,600 in 2007 alone.



The largest group of foreign migrants with rights to work in the Czech Republic comes from Slovakia. At the end of last year, 101,233 Slovakians were legally worrking in the country. Ukranians are the second most numerous group with 61,592 working in the Czech Republic last year. The number Mongolian and Vietnamese workers is also increasing rapidly. In 2007 there were 6,897 Mongolians working legally in the CR (up from 2814 in 2006) and 5,4425 Vietnamese (up from 692 in 2006). The numbers of Vientamese in the country is undoubtedly much larger - according to the Czech police, there are almost 51,000 Vietnamese holding long-term or permanent residence permits for the CR, many of these with student visas.


Certainly the Czech Republic's labour shortages are now making their present felt across the economy as a whole. Bloomberg had an in-depth article earlier in the week, where they quoted Jiri Cerny, vice president of Toyot and PSA Peugeot Citroen's joint venture in the Czech Republic, as saying that three years after opening shop in the country he feels it is getting harder by the day to find workers, and he is now actively considering importing them from Mongolia.

TPCA, the Toyota-Peugeot joint venture about an hour outside of Prague, shows the strains created by this new investment. Along with average wage growth of more than 40 percent since the Czech Republic joined the EU in 2004, managers like Cerny also face a labor shortage that means they can't recruit all the workers they need just by offering higher pay.

"It's difficult; we are always looking for employees," says Cerny, wearing the plant's trademark gray overalls as he bounces between budget meetings and the factory floor. To find qualified workers, "we're thinking about Vietnam right now, as well as Mongolia," he says.


This story is being repeated in one country after another as companies that were attracted to the formerly communist nations in eastern Europe by the promise of cheap and plentiful labor are finding less of both, as faster growth drives up wages and open borders encourage emigration. Indeed there is increasing speculation that accelerating inflation may cause eastern Europe's investment- led boom to fizzle (and possibly even crash to a dead stop), with the Baltics and Balkans regions already threatened by a "hard landing" according to the International Monetary Fund and Standard & Poor's.

Of course in the short term migration can help, but in the longer run sustainability is going to be all about getting that fertility rate back up again.