Czech Financial Sector Struggles as Retail Sales Growth Drops Sharply In August

Central European stocks dropped again on Friday, led by the banks, following the announcement that Goldman Sachs had lowered its economic forecasts for the region and the decision of Fitch Ratings to cut Hungary's foreign- debt rating. The Czech Republic's PX Index slumped 10 percent.

An index of investors' and analysts' expectations for the CEE region over the next six months plunged to minus 51.1 points in October from minus 30.6 in September according to latest the survey from the ZEW Center for European Economic Research and Erste Bank AG.

Goldman reduced the Czech Republic's 2008 growth forecast to 4.3 percent this year from 4.4 percent, while the 2009 outlook was changed to 2.5 percent from 3.8 percent.

Komercni Banka AS, the third-largest Czech bank, fell the most since 1999. OTP Nyrt. slid to its lowest level in almost five years after HSBC Holdings Plc downgraded Hungary's largest bank on concern its loan expansion may slow and credit quality worsen, while Bank Pekao SA, Poland's biggest bank, posted its steepest drop on record.

Komercni lost 530 koruna, or 17 percent, to 2,510 in Prague trading. Erste Bank AG, Austria's biggest publicly traded bank, slid 2.39 euros, or 10 percent, to 21.6 euros in Vienna.

New World Resources NV, the Czech Republic's biggest maker of coking coal for steel producers, plunged 22 percent to 111 koruna, its lowest since debuting on the bourse in May, after U.K. Coal Plc, the nation's biggest miner of the fuel, fell the most ever in London trading after saying full-year output will ``significantly'' miss a previous target because wet weather curbed third-quarter production.

The NTX Index of 30 companies in the region retreated 4.4 percent to 951.42, the lowest in almost four years, even as stocks in western Europe rose after a two-day selloff. The PX Index's drop was the biggest fluctuation among equity markets included in global benchmarks. Hungary's BUX Index fell 2.4 percent, Poland's WIG20 Index lost 6.4 percent and Austria's ATX Index declined 3.3 percent.

Clearly the financial turmoil has now crossed over the CR's doorstep, and is increasingly making its presence felt. In the meantime, and as Goldman note, the real economy is slowing.

Retail Sales Contract In August


The latest piece of evidence we have for this is the fact that Czech August retail sales fell the most in six years as inflation damped consumer spending and two fewer working days than a year ago cut shopping hours. Inflation adjusted sales (excluding automotive sales) were down 2.6 percent, compared with a 3.4 percent increase in July, according to data from the Czech Statistical Office earlier this week. Working day adjusted sales were down 0.3 percent.




If we look at the evolution of retail sales in the above chart the slowdown is evident, now we need to factor in the impact of all the financial turmoil, which is still very much a "work in progress" as far as Eastern Europe is concerned.

Writing History In The Czech Republic

The Czech Republic's PX Index posted its steepest drop on record on Friday. Erste Group Bank AG, Austria's largest publicly traded lender, and developer Orco Property Group SA sank the most since their shares were listed on the exchange, which had to suspend trading in four of the 14 listed companies during trading hours. "Today has written itself into history," said Miroslav Adamkovic, an equity analyst at Komercni Banka AS in Prague.

Obviously all of this is significant and important, and I will try and write something more substantial as and when time permits.

Czech Industrial Output Down Sharply in August

Czech industrial production fell the most in six years in August, suggesting that the slowdown in Czech economy is gathering momentum quite fast. Output fell 2.6 percent after rising 6.7 percent in July, acoording to data from the Prague-based statistical office on Thursday. This was the worst result since August 2002, when production plummeted 6.6 percent. The value of industrial new orders decreased by 10.0%, year-on-year.



And it looks very much like there is worse to come with the Markit Economics/ABN Amro Purchasing Manager's Index (PMI) for the Czech manufacturing sector fallinf for the third consecutive month in September, and remaining below the critical 50-point expansion/contraction level for the second consecutive month. The index fell to 46.5 in September, down from a reading of 47.3 in August - marking the lowest level in the survey's 87-month history and a 55.8 reading in July.

The Construction Slump Continues


The constant-price seasonally-adjusted construction output index was down by 0.1% in August, when compared with July. In comparison to August 2007, constant price output dropped by 1.2%. The planning and building control authorities granted 11 762 building permits, up 4.2% more year-on-year. Approximate value of permitted constructions was also up by 2.8% year-on-year and reached CZK 36.2 billion.



Inflation Holds Steady


Consumer price dropped in September when compared with August by 0.2 %. The downward effect on the consumer price level, month-on-month, came from the seasonal price fall in domestic recreational stays and recreational stays abroad (as in previous years at this time) and a further drop in the price of automotive fuel. The year-on-year consumer price growth accelerated to 6.6 % in September (from 6.5 % in August).





The month-on-month consumer price level decrease by 0.2 % owed mainly due to a price reduction in 'recreation and culture', in which prices of package holidays went down by 14.6 %. In the 'transport' section the drop in the price of automotive fuel continued for the third month and was 1.7 % in September. The price of petrol and diesel oil was the lowest in the last five months. In 'food and non-alcoholic beverages' prices of fruit, potatoes and other vegetables were all down (by 7.8 %, 8.8 % and 9.2 %, respectively). Prices of rolls and baguettes dropped by 3.3 %, flour by 5.6 %, eggs by 2.3 % and cheese by 1.4 %. In the 'communications' section, prices decreased by 1.1 % due especially to due to lower prices for mobile roaming services.

In terms of the year-on-year comparison, in September, the increase in consumer prices was 6.6 %, i.e. 0.1 percentage point up on August. An price increases accelerated primarily in 'alcoholic beverages and tobacco', 'recreation and culture' and 'education'. Prices of tobacco products rose by 13.1 % (from 8.9 % in August). In spite of a marked month-on-month drop in prices of package holidays, their prices were 1.5 % up, year-on-year. In the 'education' section the y-o-y growth accelerated almost in all levels of educational services. On the other hand, in 'food and non-alcoholic beverages', the y-o-y growth of prices slowed down mainly due to changes in prices of fruit, which were lower by 2.2 % in September (a 3.7% growth in August). Similarly, prices of unsalted butter dropped to 7.6 % in September, while in August they were 1.4 % up. A slowdown in the growth of prices was recorded primarily for rolls and baguettes to 25.6 % (from 30.1 % in September), flour to 40.5 % (from 61.6 % in August) and cheese to 4.9 % (from 10.5 % in August).

The biggest effect on the price level still came from 'housing, water, electricity, gas and other fuels', where prices of natural gas rose by 27.5 %, electricity by 9.5 %, heat and hot water by 11.1 % and solid fuels by 19.9 %. Net actual rentals rose by 14.7 %, of which for dwellings with regulated rentals by 22.3 %, while for dwellings with market rentals by 3.0 %. In 'transport', prices of automotive fuel were higher by 4.3 % (by 5.2 % in August), which is the lowest y-o-y increase over the last eleven months. The growth of petrol prices ranged from 1.7 % to 3.2 %, while the growth of diesel oil prices was 13.3 %.


The average number of persons employed in industry decreased in August 2008 by 5.7 thousand persons, y-o-y (i.e. -0.5%). Employment decreased most in 'manufacture of textiles and textile products' (-12.5%), 'manufacture of leather and leather products' (-6.9%) and in 'electricity, gas and water supply' (-6.8%). Increases in average number of persons employed were registered in 'manufacture of transport equipment' (+4.8%), 'manufacture of electrical and optical equipment' (+3.2%) and 'manufacture of rubber and plastic products' (+1.9%).

The average hourly wage increased by 13.4% and stood at CZK 172.4.