Industrial Output Falls Back In May 2008

Czech seasonally adjusted industrial output was down by 0.7% in May over April 2008. Industrial production was up 3.4%, year-on-year. The value of industrial new orders was down 1.9%, year-on-year.



Industrial employment increased in May by 22.5 thousand persons over May 2007(i.e. it was up 1.9%). The largest increases were registered in the manufacture of electrical and optical equipment (+6.7%), the manufacture of rubber and plastic products (+5.5%) and in the manufacture of transport equipment (+4.4%). Employment dropped the most in the manufacture of coke and refined petroleum products (-7.0%), the manufacture of textiles and textile products (-5.0%) and in the manufacture of leather and leather products (-4.7%).

The average monthly nominal wage was CZK 23,256 in May (up by 7.1%, y-o-y). The average hourly wage increased by 13.3% (CZK 164.7). Industrial labour productivity increased by 1.2% year on year. while hourly labour productivity was up by 7.4%.

In a separate report the statistics office said that seasonally adjusted total construction output at constant prices increased in May by 0.2%, compared with April. When compared with May 2007, output at constant prices fell by 2.9%. The planning and building control authorities granted 11 379 building permits, i.e. 11.5% up year-on-year. The approximate value of authorised constructions was up by 35.9% year-on-year and reached CZK 34.8 billion. Looking at the chart below the Czech Republic certainly hasn't been passing through a construction boom.

Czech Inflation Drops Slightly in June 2008

Czech inflation slowed again slightly in June as the strong koruna helped to keep the rate down, giving the central bank room to delay further interest rate increases at this point. The inflation rate fell to 6.7 percent from 6.8 percent in May, the Prague-based statistics office said in a statement today. The inflation rate has now been dropping steadily since touching a nine year high of 7.5% in January and February. This months result is in line with the central bank's forecast, although it is still significantly above its 3 percent mid-point target. Month on month consumer prices rose 0.2 percent from May.




Today's report confirms central bank expectations that inflation may return to within the target range by early next year without any additional rate-lifting on top of eight in the past 2 1/2 years, to 3.75 percent. The koruna, which has risen by 21 percent against the euro and 41 percent against the dollar in the past year, maintained these gains even after the European Central Bank raised its benchmark rate to 4.25 percent last Thursday.

Prices of clothing, cars and some electronics fell on the month, while food stagnated from May and added 10.4 percent year on year. Cigarette prices and alcohol rose 0.2 percent from the previous month as producers and retailers began to run out of stocks accumulated before excise tax on tobacco was raised.

The price of motor fuels grew 3.3 percent in the month, reflecting a 10.1 percent jump in global oil prices in June on top of a 34 percent growth in the first five months of 2008.

The central bank expects the inflation rate to slide to its targeted range of 2 percent to 4 percent at the beginning of next year as a result of the koruna strengthening, a mitigating effect of one-time influences such as increases in indirect taxes and regulated costs wane and a faltering consumer spending.

That outlook suggests stable interest rates in the months to come and even the possibility of a reduction before the year's end, as suggested by the central bank's staff forecast from early May. The koruna may even allow policy makers to lower rates more than previously indicated minutes from the central bank's June 26 policy meeting indicate.

``Given the current exchange-rate trend, the implied interest rate path of the August forecast might be even lower than that of the May forecast,'' the bank said in the minutes, released on July 4. Decision makers next meet on Aug. 7 to set rates and to publish a new quarterly inflation prediction.

Czech Exports Slow in May

Czech exports stagnated in May, after clocking in a 13 percent year on year increase in April, a sign that the twin effect of the rise in the koruna and faltering demand in Western Europe is now beginning to hurt exporters. Imports fell 2 percent from a year ago, contributing to a trade surplus of 9.2 billion koruna ($609 million). This surplus compares with 8.3 billion koruna one in April, and a 5.3 billion koruna a year ago.



The strange form the imports line adopts would seem to me to be more a consequence of the early calendar date of Easter this year than anything else. Demand for Czech goods in Western Europe is now waning as hedging contracts against the Koruna rise expire and the euro region economy, which is the Czech Republics key trading partner, visibly entering a slowdown.



The koruna has been the world's best-performing currency so far this year, and advanced 13 percent against the euro in the 12 months through May (and was 30.5 percent stronger against the dollar). This sustained appreciation gradually makes exporting more difficult and reduces the chances that we will see a fourth record full-year trade surplus in 2008.

May exports of 205.2 billion koruna, the lowest this year, were unchanged from a year ago. Exports were fueled by a 2.5 percent increase in exports of telecommunication equipment, computers and cars.

Imports fell to 196 billion koruna, also the lowest so far in 2008, which may indicate that companies are cutting back on investments, economists said. The koruna advance also lowers the value of imports in the domestic currency and the slowest household spending in 2 1/2 years dents imports for consumption.

Czech Retail Sales April 2008

In April, seasonally adjusted retail sales (except automotive segment) grew by 0.7% month-on-month and by 2.0% year-on-year, at constant prices. The increase of 3.5% in not seasonally adjusted sales was higher than the average growth from the start of the year. Only sale of non-food goods grew; sale of food, beverages and tobacco continued to decrease. Seasonally adjusted sales in the automotive segment dropped by 0.4% month-on-month but were up by 2.3% year-on-year, at constant prices; not seasonally sales were up by 6.8%. Seasonally adjusted sales in hotels and restaurants increased by 0.2% month-on-month and unadjusted sales dropped by 1.1% year-on-year.



This is a modest increase, and if taken together with the data from Eurostat today showing the Czech construction industry declined by 3.5% year on year in April it would definitely suggest that the pace of growth is slowing at the present time.

Czech Producer Prices May 2008

Czech industrial producer prices in May rose at the fastest pace in four months, fueled by refined products after global oil costs surged to a record. Prices advanced 1 percent from the previous month, after being unchanged in April. The annual rate increased to 5.2 percent from 4.7 percent in the previous month, according to the latest data from the Prague-based statistics office.




Agricultural producer prices, which are not part of the industrial price index and signal the future direction of consumer food prices, advanced 0.5 percent in the month while the annual rate climbed to 28.2 percent from 27.9 percent in April.

In May 2008, compared to the previous month, prices of agricultural and industrial producers, construction work and market services grew by 0.5%, 1.0%, 0.4% and 0.1%, respectively. In comparison to May 2007, prices of agricultural and industrial producers increased by 28.2% and 5.2%, respectively; prices of construction work and market services were up by 5.0% and 4.0%, respectively.

In April 2008, export prices did not change, import prices increased by 0.1%, month-on-month. Year-on-year, export prices fell by 5.0% and import prices by 4.2%. The terms of trade figures reached 99.9%, m-o-m, and 99.2%, y-o-y.





Agricultural producer prices grew by 0.5% in total. Prices of crop products rose by 2.4% due to higher prices of cereals (+2.1%), fruit and oil plants (+2.3% both), and hops (+93.4%). The prices of potatoes and vegetables fell by 2.7% and 20.2%, respectively. Prices of animal products decreased by 2.2%; prices of eggs (-5.6%) and milk (-5.8%) were lower. Higher prices were recorded for cattle for slaughter (+0.4%) and pigs for slaughter (+4.2%).

Industrial producer prices grew by 1.0% (no change in April). Prices went up most markedly in ‘coke, refined petroleum products’ (+9.1%, the highest increase since June 2004) and ‘basic metals, fabricated metal products’ (+2.1%). On the other hand, prices in ‘food products, beverages and tobacco’ went down by 0.2% (lower prices of tobacco and dairy products).

Construction work prices rose by 0.4%, construction material input prices grew by 0.2%.

Prices of market services in the business sphere grew by 0.1%, due to a 0.2% price rise in ‘real estate, renting and business services’ (prices of computer activities up by 0.6%).


Year-on-year comparison

Agricultural producer prices were higher by 28.2% (+27.9% in April). Prices of crop products grew by 41.1%, mainly due to higher prices of cereals (+57.7%), oil plants (+71.9%) and hops (+135.0%). The prices of fruit increased by 42.2%. The prices of potatoes and vegetables fell by 45.9% and 0.9%, respectively. Prices of animal products were higher by 12.6%. The prices of milk, poultry, eggs and cattle for slaughter grew by 17.6%, 15.8%, 14.2% and 8.0%, respectively. Lower prices were recorded for cattle for slaughter (-1.9%).

Industrial producer prices rose by 5.2% (+4.7% in April). The price level was the most influenced by prices of ‘coke, refined petroleum products’ (+28.3%) and prices of ‘food products, beverages and tobacco’ (+8.6%). Prices went up particularly in ‘prepared animal feed’ (+35.8%), ‘dairy products and ice cream’ (+10.4%) and ‘other food products’ (+8.0%). Prices of ‘electrical energy, gas, steam and water’ increased by 9.1%. Prices decreases were recorded only in ‘transport equipment’ (-4.1%), ‘rubber and plastic products’ (-2.8%), ‘wood and products of wood and cork’ (-3.9%) and ‘textiles and textile products’ (-0.5%).
Among the main industrial groupings, prices of ‘energy’ (+15.1%) and ‘non-durable consumer goods’ (+4.2%) increased the most.

Construction work prices were higher by 5.0% (+4.9 in April); construction material input prices grew by 2.6% (+ 2.9% in April).

Prices of market services in the business sphere were higher by 4.0% in total (+4.3% in April). Prices of ‘real estate, renting and business services’ increased by 5.6% (prices of advertising services up by 10.4%). Prices of ‘freight transport and storage services’ and ‘financial intermediation, except insurance and pension funding’ increased by 2.5% and 2.2%, respectively.

Czech GDP Q1 2008 (Revised Data)

The Czech economy expanded at the slowest pace in more than three years in the first quarter as consumer spending weakened, taking some of the pressure off central bank policy makers to raise interest rates.

Gross domestic product rose 5.3 percent, compared with a revised 6.3 percent in the previous quarter and a preliminary 5.4 percent announced on May 15, the Czech Statistical Office said today. The economy's rate of expansion slowed for a third consecutive quarter after peaking at a record 6.8 percent in 2006.

Household spending was constrained by inflation, which accelerated to 7.5 percent in January, the fastest pace in a decade, before slowing to 6.8 percent in the past two months.

While inflation has been driven by global increases in food and fuel costs and the Jan. 1 tax and regulated-price increases, a fourth year of economic growth topping 5 percent, driven by rising wages and consumer spending, has also helped push prices up.

The waning impact of domestic demand on GDP growth, along with an appreciating koruna, has added to optimism that the inflation rate will fall to its mid-point 3 percent target early next year. The koruna has gained 7.6 percent against the euro so far this year and 16 percent over the past 12 months.

The Ceska Narodni Banka, the government and economists expect the economy to lose momentum this year, growing below 5 percent from a revised 6.6 percent in 2007 because of a projected slowdown in the euro region, faster inflation, limited government social expenditures and the appreciating koruna.

Consumer spending, the main engine of GDP growth in the past two years, rose 2.8 percent year on year in the first quarter, compared with 4.2 percent in the preceding period. Household spending accounted for 1.3 percentage points of GDP growth.

Exports of goods and services climbed an annual 13.8 percent in the first quarter, outpacing a 12.1 percent increase in imports. Government expenditure gained 0.7 percent in the January- March period.

Gross fixed investment rose an annual 2 percent, the slowest pace in more than two years, compared with 7.5 percent in the fourth quarter. That may signal that Czech manufacturers are cutting back on investment in reaction to falling orders from abroad.

The central bank, which forecasts this year's GDP growth at 4.7 percent and 4 percent in 2009, had expected the economy to grow by 6.3 percent from January through March, and the difference between this forecast and the actual result is largely the result of revisions in data for earlier quarters according to the central bank.

On the other hand the central bank's May inflation prediction anticipated a more moderate slowdown of consumer spending and an acceleration in investment growth.

Czech Inflation May 2008

The Czech inflation rate in May was unchanged from April at 6.8 percent as rising food and fuel costs prevented a third consecutive decline in annual price growth and reduced short term prospects for an interest rate cut.

Consumer prices rose 0.5 percent month on month, following a 0.4 percent jump in April, according to the Prague-based statistics office today.




Inflation has exceeded the Ceska Narodni Banka's 4 percent upper limit in every month since November, driven by food and oil and rising taxes and regulated costs. The central bank predicted the rate would fall to its 3 percent target in early 2009 without raising rates.

The possibility definitely exists that the inflation rate may rise again above 7 percent in the months to come, after peaking at a decade-high of 7.5 percent in January and February. The central bank next meets on June 26 to set interest rates.

The cost of motor fuels added 3.9 percent from April, with diesel reaching a record, the office said. The increase reflected a 16 percent advance in global oil prices during May. Prices of food, with a one-fifth weighting in the consumer basket, surprisingly rose 0.7 percent from April and 10.6 percent from a year earlier, led by vegetables, fruit, bread and rice, according to the central bank.

The Czech central bank is to some extent relying on the koruna's strength to slow household and import demand this year and to counter the inflationary effect of a fourth year of economic growth of over 5 percent. The most recent staff projection seemed to imply a cut in what is the European Union's lowest main rate of 3.75 percent as early as this year, but this forecast is now looking extremely precarious.

The so-called monetary policy-relevant inflation rate, which excludes the first-round impact of tax changes, fell to 4.6 percent in May. Monetary policy makers disregard the primary impact of cost shocks and regulated-price influences as they are out of the reach of monetary policy and are typically of a one-time nature. Instead, the bankers focus on their second-round effects such as increased demands for pay rise as a way to compensate for inflation spike, which could prevent a decline in inflation.

May core inflation, (which is price growth adjusted for volatile items such as food and motor fuels) accelerated to 2.85 percent from 2.75 percent, suggesting persisting demand pressures and the danger of more "second round" effects.

Today's figure may add to concerns by some board members that the koruna, which gained 16 percent against the euro and 36 percent against the dollar in the past 12 months, may not now be as effective an inflation damping tool as it has been in the recent past.

Wages grew an annual 10.4 percent in the first quarter to 22,531 koruna ($1,398), the biggest jump in more than nine years, the statistics office reported on June 2. Even when adjusted for the fastest inflation in a decade, growth of real salaries accelerated to 2.8 percent from 1.7 percent in the fourth quarter of 2007.

Under the European Union's harmonized consumer prices index was up 0.4 percent month on month and 6.8 percent from a year earlier, following a 6.7 percent rate in April, the statistics office reported today.

Czech Wages and Salaries Q1 2008

Czech real-wage growth accelerated in the first quarter, raising concern that the central bank will lift the European Union's lowest interest rates once again.

The average gross monthly wage added 10.4 percent to 22,531 koruna ($1,398), the biggest jump since Q4 1998. The average monthly paycheck rose 2.8 percent, adjusted for inflation, compared with a revised 1.7 percent in the previous quarter, the Prague-based statistics office said today.



Real wages will probably continue to grow more slowly this year as rising consumer prices eat up most of nominal pay increases. The central bank expects inflation to return to its 3 percent target early next year, but this obviously remains to be seen. Policy makers monitor wage growth as a secondary indicator of price growth.




The average inflation-adjusted monthly wage rose 4.5 percent at private companies as the jobless rate fell to 5.2 percent in April, the lowest since the data series started in 2004. Gross private wages rose 12.2 percent in a year.





Salaries of state employees grew 3.5 percent in the quarter from a year earlier to 20,204 koruna, a 3.6 percent decline in real terms. The government, which last year capped public wage gains to curb a jump in spending, will probably face increased pressure to raise public wages, economists said.

The smallest relative growth of nominal wage (by CZ-NACE section) was recorded in education, public administration and defence, compulsory social security (both by 3.0%) and in health and social work, veterinary activities (by 5.3%). The biggest growth was recorded in electricity, gas and water supply (by 18.2%), fishing, fish farming and related service activities (by 17.2%) and real estate, renting and business activities (by 17.1%).

Monetary policy makers will evaluate the effects of accelerating inflation and currency gains on economic growth before deciding whether to further raise interest rates from 3.75 percent, currently the lowest in the European Union.

Czech Retail Sales March 2008

Czech retail sales showed fell month on month, and year on year in March, after 51 months of consecutive growth. The data were partly influenced by seasonal factors (Easter was in March)and but also provided some evidence of a trend towards slowing consumption. Retail sales fell 2.9 percent year-on-year in March, compared to a 6.3 percent growth in February, data from the Czech statistical office (CSU) showed today. The office said that a drop in sales of pharmaceuticals and food, along with the Easter holiday were the main factors behind the drop.

In March, seasonally adjusted sales in retail trade except of automotive segment dropped by 0.6%, month-on-month, at constant prices, and in the year-on-year comparison, sales increased by 0.7%. Seasonally non adjusted sales dropped by 2.1% after 51 months of incessant growth. The y-o-y sales decrease was recorded in the sale of food, beverages and tobacco and also in the non-food goods sale. Seasonally adjusted sales in automotive segment dropped by 2.2%, m-o-m, at constant prices, in the year-on-year comparison by 0.1% and not seasonally adjusted by 4.4%. Seasonally adjusted sales in hotels and restaurants decreased, m-o-m, by 0.5% and not seasonally adjusted dropped by 3.4%, year-on-year.
CSU Statistics Office

The figures were definitely influenced by seasonal factors and the fact there were two less working days. Overall, however, when adjusted to take allowance of this there is still clearly a deceleration trend.

Czech GDP Q1 2008

The Czech Republic's economy expanded 5.4 percent in the first quarter, the slowest pace in more than three years, as consumer spending waned. The preliminary growth figure compares with 6.6 percent in the previous three-month period, the Czech Statistical Office said today. Seasonally adjusted GDP growth was also 5.4 percent, while quarter on quarter the economy expanded 0.9 percent.



The expansion has faltered as household consumption was damped by higher indirect taxes and surging inflation, which has been above Ceska Narodni Banka's ceiling since November. Inflation has been driven by global increases in food and fuel costs and government measures that are beyond the bank's influence.

The increase of economic performance was partially connected also with higher employment. According to an estimate that used the results of the labour force sample survey in combination with currently available administrative data, seasonally adjusted total employment in Q1 2008 increased by 0.3% quarter-on-quarter and by 1.7% year-on-year. NSA employment was by 1.9% higher year-on-year.



A third of the increase of economic performance was due to higher employment; the remaining two thirds are attributable to the growth of total labour productivity. The trend of certain price segments varied considerably – a marked seven per cent price growth of household expenditure on the one hand, and by 1.3 p.p. higher decrease of export prices than of import prices on the other. These and other impacts partially compensated one for another so that the overall price level measured by GDP deflator increased by three per cent.


The decreasing effect of domestic demand on GDP growth, along with an appreciating koruna, has added to the central bank's optimism that the inflation rate will slide back to the mid-point 3 percent target by next year, from 6.8 percent in April. A strong koruna, which has gained 6.1 percent against the euro this year, has helped temper rising prices

Consumer prices grew more than 7 percent in each of the first three months of 2007 and a close to a decade high of 7.5 percent in February. Rising prices prompted the central bank to raise its benchmark two-week repurchase rate to 3.75 percent in February, the fifth increase since May 2007.

Czech Industrial Output March 2008

Industrial output data for March showed the first drop after 5-1/2 years of growth, adding to previous poor purchasing managers index (PMI) and foreign trade figures.
Output fell 2.1 percent year-on-year in March, far worse than a 4.8 rise forecast by analysts and in stark contrast to an 11.3 percent rise the previous month.
The Czech data mirrored March results elsewhere in emerging Europe. In Slovakia, the region's growth leader, output slammed on the brakes to grow just 1.8 percent.
Part of the drop could be attributed to the Easter holiday, which came earlier than usual this year.

Czech Unemployment April 2008

The Czech unemployment rate fell in April, reinforcing concerns that the tight labour market poses a serious risk for the development of inflation.

Unemployment fell to 5.2 percent in April from 5.6 percent in the previous month, and in line with expectations in a Reuters analyst poll, data from the labour and social affairs ministry showed. Year-on-year, unemployment fell from 6.8 percent registered in April 2007.

Wages in industry are growing growing above 11 percent which reinforces the Czech central bank's concerns that the tight labour market and growing wages are the key upside risks to inflation.

On April 30, 2008 job offices registered altogether 316,118 job seekers. That is by
20,179 less than at the end of March. The number of job seekers decreased by 86,814 persons compared with the same period of the preceding year. The number of available job seekers job seekers currently available for work) was 292,465.




In the course of April, job offices registered altogether 42,515 newcomers. That is by 4,484 job seekers more than in the preceding month and by 1,659 newly registered job seekers more than in April of the preceding year. In April, job offices registration was terminated with 62,694 seekers. New jobs have been taken up by – 42,596 persons. In the course of the above-said month, job offices excluded 20,098 job seekers due to other reasons.





Harmonized unemployment rates (EUROSTAT) was 4.6 % in March 2008.

Czech Inflation April 2008

The Czech Republic's April inflation rate fell less than economists forecast, raising the prospect that the central bank will hold off on cutting interest rates in the near future. The inflation rate dropped to 6.8 percent from 7.1 percent in March and a near decade-high of 7.5 percent in February, the Prague-based statistics office said today. The central bank forercast was for a rate of 6.7 percent. Consumer prices rose 0.4 percent in the month, following a 0.1 percent drop in March.




Housing costs were 0.6 percent higher than in March, led by a 2.9 percent increase in natural gas prices for households. Prices of food increased half a percent from March, following two months of a decline, and were 9.6 percent higher compared with March last year.

The inflation rate has exceeded Ceska Narodni Banka's 4 percent ceiling since last November, driven by global increases in food and fuel costs and government spending measures that are beyond the bank's direct influence.

The Czech central bank said today in a statement posted on its Web site that inflation has passed its peak and its expects price growth to return to ``low levels corresponding to its targets at the end of 2008 and the beginning of 2009.''

However the bank did say the reading exceeded its forecast as a result of higher-than-expected adjusted inflation without fuels which "could signal continuing inflationary pressures from the domestic economy."

The central has relied on the koruna's 12 percent gain against the euro in the past 12 months, slowing economic growth and the mitigating effect of regulated price growth to curb inflation to 2.9 percent in the first quarter and to 2.2 percent in the third quarter of 2009.

The Czech National Bank left its benchmark interest rate unchanged at 3.75 percent for a second consecutive meeting last week continuing to bank on the impact of a strong koruna and a developing economic slowdown to damp inflation.

Czech Imports and Exports March 2008

In March 2008, according to preliminary data, exports and imports at current prices fell by 5.6% and 2.4% year-on-year, respectively. At the same time the trade balance reached a surplus of CZK 8.1 billion in March, CZK 7.4 billion less than March 2007. The balance was unfavourably influenced by a CZK 4.9 billion decrease of surplus in machinery and transport equipment and by a CZK 3.7 billion increase the deficit for mineral fuels, lubricants and related materials.

According to preliminary data, seasonally adjusted exports decreased by 6.2% and imports by 9.0%, month-on-month. The trend component fell by 1.2% in exports and rose by 0.2% in imports.

The March results were influenced by the smaller number of working days (March 2008 had two working days less than March 2007), the presence of the Easter holiday and by the high comparative base of March 2007.

Exports recorded the biggest fall since August 2002 and imports the biggest since May 2005. The last year-on-year decreases were registered in January 2004 (-0.2%) for exports and in July 2005 (-2.0%)for imports. Due to appreciation of the koruna against the euro and even more against the US dollar, external trade grew faster when measured in euros (exports +5.0% and imports +8.5%) and US dollars (exports +23.1%, imports +27.2%) than in korunas.

The Czech currency has strengthened by 12 percent against the euro in the past 12 months and is the world's second best-performing currency against the dollar over the past year.

The trade balance had a surplus of CZK 8.1 billion, which was down CZK 7.4 billion, year-on-year, registering the largest year-on-year fall since April 2003. The trade balance with EU states was positive by CZK 41.1 billion and with non-EU states negative by CZK 33.0 billion.






Trade balance was negatively influenced by the fall of surplus of trade in ‘machinery and transport equipment’ (by CZK 4.9 billion) and by the growth of deficit of trade in ‘mineral fuels, lubricants and related materials’ (by CZK 3.7 billion). Surplus of trade in ‘miscellaneous manufactured articles’ dropped by CZK 0.9 billion and the trade balances of ‘chemicals and related products’, ‘manufactured goods classified chiefly by material’ and ‘beverages and tobacco’ remained on the same level as in March 2007. Trade balance improved in ‘food and live animals’ (deficit down by CZK 1.5 billion) and ‘crude materials, inedible, except fuels’ (surplus up by CZK 0.4 billion).

Total exports of ‘machinery and transports equipment’ fell by 6.0% (CZK 7.2 billion), of which the biggest decreases were recorded in ‘road vehicles’ (CZK 3.9 billion), ‘other transport equipment’ (CZK 1.1 billion) and ‘general industrial machinery and equipment’ (CZK 0.7 billion). Total imports of ‘machinery and transport equipment’ were down by 2.7% (CZK 2.3 billion) and the biggest decreases were registered in the same commodity groups as in exports. The biggest increase in imports was achieved in ‘telecommunications and sound-recording equipment’ (CZK 1.9 billion).

Higher imports of ‘mineral fuels, lubricants and related materials’ by 36.0% (CZK 5.2 billion) were mainly due to higher imports of crude petroleum (+44.7% in value, +6.2% in volume) and natural gas (+47.2% in value, +39.2% in volume).

By group of countries, trade surplus with EU states dropped by CZK 7.3 billion and trade deficit with non-EU states increased by CZK 9.5 billion. Trade surplus grew with France (by CZK 2.6 billion), Romania (by CZK 1.3 billion), Ukraine (by CZK 0.5 billion) and Poland (by CZK 0.4 billion). Trade balance improved with Finland (by CZK 0.4 billion) as deficit turned into a surplus. Trade deficit rose with the Russian Federation (by CZK 3.3 billion), China (by CZK 1.2 billion) and Japan (by CZK 0.8 billion). Trade surplus deteriorated with Kazakhstan (by CZK 0.9 billion), Serbia (by CZK 0.8 billion) and the United States (by CZK 0.6 billion) as surplus turned into a deficit. Trade surplus fell with Austria (by CZK 0.6 billion), Germany (by CZK 0.5 billion) and Slovakia (by CZK 0.1 billion).

In the twelve months to March 2008, compared with the previous twelve months, exports and imports grew by 12.0% and 11.1%, respectively. The trade balance reached a surplus of CZK 81.4 billion, which was an improvement of CZK 27.5 billion.

Favourable development was reported for trade in ‘machinery and transport equipment’ (surplus up by CZK 36.8 billion), ‘crude materials, inedible, except fuels’ (surplus up by CZK 8.6 billion), ‘food and live animals’ (deficit down by CZK 2.8 billion)), ‘animal and vegetable oils, fats and waxes’ (deficit down by CZK 1.2 billion) and ‘beverages and tobacco’ (improvement by CZK 1.2 billion as deficit turned into a surplus). Trade balance deteriorated in ‘chemicals and related products’ (deficit up by CZK 12.2 billion), ‘manufactured goods classified chiefly by material’ (surplus down by CZK 8.0 billion) and ‘miscellaneous manufactured articles‘ (surplus down by CZK 2.3 billion) and ‘mineral fuels, lubricants and related materials’ (deficit up by CZK 0.4 billion).

By group of countries, trade surplus with EU states rose by CZK 65.5 billion and trade deficit with non-EU states increased by CZK 38.0 billion. Deficit decreased in trade with the Russian Federation (by CZK 21.0 billion); and surplus rose in trade with Slovakia (by CZK 15.3 billion), France (by CZK 12.8 billion), the United Kingdom (by CZK 10.3 billion), Italy (by CZK 7.8 billion), Poland (by CZK 7.3 billion) and Germany (by CZK 1.0 billion). Trade balance improved with the Netherlands (by CZK 7.1 billion) and Norway (by CZK 6.7 billion) as deficit turned into a surplus. Trade deficit grew with China (by CZK 48.5 billion), Japan (by CZK 15.8 billion), Thailand (by CZK 7.0 billion), Korea (by CZK 5.4), Ireland (by CZK 5.0 billion) and the United States (by CZK 5.4 billion). Trade surplus fell with Austria (by CZK 8.1 billion) and Hungary (by CZK 6.6 billion).

Czech National Bank Holds Interest Rates

The Czech National Bank left its benchmark interest rate unchanged for a second consecutive meeting today as it banks on the strong koruna and an economic slowdown to damp inflation. The Ceska Narodni Banka seven-member board kept its two-week repurchase rate at 3.75 percent.



The inflation rate, at 7.1 percent in March, has exceeded the central bank's 4 percent ceiling since November. Still, policy makers, who doubled borrowing costs over the past 2 1/2 years, are reluctant to lift rates further as the strong koruna and a global economic slowdown threaten to weigh on local exporters and stifle economic growth more than anticipated.

The Czech currency's strengthening of 12 percent against the euro in the past 12 months may contain inflation by holding down import price growth and weigh on economic growth. The koruna was trading at 25.138 against the euro as of 2:34 p.m. in Prague, compared with 25.207 yesterday.

Rate setters consider the current inflation spike a one-time event, triggered by factors outside of the central bank's reach. They are concerned about the second-round effects of unexpectedly fast price growth, including accelerated pay increases after unemployment slid to an 11-year low.

In its last staff prognosis from February, the central bank predicted the inflation rate to drop to 3.4 percent in the first quarter of 2009 and 2.3 percent between July and September 2009.

The bank's target is 3 percent plus or minus a percentage point. When setting rates, policy makers focus on 12-18 months ahead, when their current decisions should have worked through the economy.

The main Czech lending rate is a still a quarter percentage point lower than the ECB's benchmark rate. Any eventual rate increase could spur additional gains to the koruna, which already is the world's second best-performing currency against the euro and dollar in the past year.

The central bank three months ago forecast the economy will expand 4.1 percent this year and 4.6 percent in 2009, compared with a record growth rate of 6.5 percent last year.

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.''

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.

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

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%.

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%.