Czech Central Bank Keeps Interest Rates On Hold

Well, it seems we now have a rather fascinating situation on our hands, since raising interest rates appears to have just gone out of fashion. Not that the decision of the Czech Central bank to hold interest rates steady today should have come as any great surprise, with oil prices dropping back and the Czech economy visibly slowing (not to mention the fact that Germany - probably the CRs largest single customer - is now sliding into a full blown recession), but what is so impressive about events this week is the way almost all the global central banks are now speaking with one, almost monotonous voice, on the back of the latest bout of financial turmoil in the United States: no rate rises fot the time being.

And thus it was today with the Ceska Narodni Banka whose board voted 4-2 to leave the two-week repurchase rate at 3.5 percent, following in the footsteps of the Polish and Romanian national banks who have also this week left their benchmark interest rates on hold.



Indeed far from raising, the main consideration was whether or not to lower rates again (following last months quarter point reduction), and during the meeting, two board members argued in favour of cutting to 3.25 percent immediately. Following the meeting Governor Zdenek Tuma reiterated that the bank's August forecast assumes further rate cuts:

``In the end, the opinion to hold won out not so much because the fundamental arguments for lowering were doubted, but mostly, precisely because of the respect for the large uncertainties and volatility in a number of factors in recent weeks,''

In part the justification for holding (and even cutting) rates is that inflation is clearly on the wane. The Czech inflation rate fell in August to the lowest so far this year as costs of food and fuel declined, raising the chances that price growth will slow to the central bank's target in early 2009. The annual rate dropped to 6.5 percent from July's 6.9 percent, according to data from the national statistics office earlier this month.



The koruna has now fallen back 3 percent against the euro since the central bank lowered its benchmark rate a quarter of a point on Aug. 7, turning the currency from one of the best performing to the third-worst performer among the 26 emerging market economies in the MSCI index.

Slowing Industrial Output

Czech indutrial output fell in July, by 0.7% on a seasonally and working day adjusted basis when compared with output in May. On an annual basis production was up by 2.2%, but when allowance is made for the 3 extra working days in July 2008 output was only up by 0.6%.



Looking at the above chart we should remember that due to the early timing of easter this year (in March) data everywhere have been a complete hodge podge. If we assume that the March/April reading need averaging out, what we find is that the rate of increase in Czech industrial output has been slowing steadily since last February. This picture is further confirmed by the seasonally adjusted output index, which clearly peaked in February, lurched down in March, rebounded in April and has since steadily headed south. In part this is due to slowing export activity and consumption in Germany, and in part it is due to the high krona, but whichever way you look at it things are slowing significantly.

Construction Output Also Slowing

In July seasonally adjusted total construction output at constant prices was up by 1.1%, compared with June. In comparison to July 2007, output at constant prices grew by 6.9%. The planning and building control authorities granted 11 055 building permits, i.e. 13.5% more year-on-year than in July 2007. The approximate value of authorised constructions increased by 16.2% year-on-year at non inflation adjusted prices and reached CZK 35.0 billion.



However when adujsted for working days total output rose by 1.8% (July 2008 had three working days more). The fastest growth was recorded in civil engineering, in the areas of new construction, reconstruction and modernisation as well as repair and maintenance. Civil engineering is of course recepient of most of the resources from EU structural funds going to the construction industry.

What we can see from the above monthly chart is that construction activity has gone in waves. We can also see that the latest wave ground to a halt during the spring of 2007. As we can see from the annual index below, construction activity has been rising steadily since 2000. It now remains to be seen for how much longer this sort of pace can be sustained.

Czech Retail Sales Slow Further in July

Czech retail sales growth slowed further in July, providing more evidence of the steady deceleration in the economy. In fact sales continued to rise year on year simply because there were 3 more working days in July 2008 than in July 2007.



Seasonally adjusted retail sales (excepting the automotive segment) were down by 0.6%month-on-month at constant prices in July. The year-on-year increase was 1.0% (without seasonal and wd adjustment they increased by 3.4%). The biggest contribution to the growth of sales came from the sale of books, newspapers and stationery, other retail sale in specialised stores and sales of furniture, lighting equipment and household articles, electrical appliances, radio and television goods, hardware, paints and glass in specialized stores.

In the automotive segment, seasonally adjusted sales at constant prices were down by 3.9% m-o-m and down by 2.2% y-o-y. Not seasonally adjusted sales grew by 4.0% year on year. Seasonally adjusted sales in hotels and restaurants dropped by 0.6% m-o-m and not seasonally adjusted sales decreased by 3.0% y-o-y. That is, tourism and services generally have been having a hard time of it.

Czech Export Growth Remains Lacklustre In July While Imports Fall

Exports from the Czech Republicc roseat  an annual 3.2 percent in July  - reaching  204.1 billion koruna - compared with a 1.7 percent increase in the previous month. Imports totaled 196.8 billion koruna, and were down 0.9 percent on  the year after a 1.1 percent drop in June. The fall in imports is a pretty clear reflection of the slowdown in internal demand, although ironically this will initially be reflected in a slight upward movement in GDP as the net external trade contribution rises slightly.



The export performance was all the weaker taking into account the fact that there were three more working days in July compared with the same month last year. The position hasn't been helped by a dramatic decline in European car sales.German car registrations fell an unadjusted 10.4 percent in August, (there were  two fewer working days), and this was  the third monthly decline this year.  

Elsewhere things were much worse. In Ireland, new sales continued downwards in August, with  August monthly sales figures down by 41.6 per cent on last year. Spanish car sales fell by 41.3 per cent in August, their sharpest decline this year. Data issued by Spanish industry group Anfac showed a fall in showroom traffic across regions as the economy moved close to a recession. Italy's sales fell for the eighth month in a row, down 26.42 percent to 77,156 units, the biggest monthly drop this year, according to government figures. For the first eight months, sales totalled 1,531,598 units, down 12.04 percent.  Car sales in France did better, falling by  7.1 per cent  year on year uncorrected, and rising slightly at 2.2 per cent when adjusted for differences in working days.

In general terms the Czech Republic is beginning to feel the twin  impact of slowing growth in the 15-member euro region - the country's main trading partner - and the appreciation of the koruna, which rose to a record of 22.877 on July 21, and has further weighed on exporters by making Czech goods more expensive abroad.

Trade Surplus Narrows

The Czech Republic's trade surplus narrowed in July from the previous month. Goods flowing out of the country exceeded imports by 7.2 billion koruna ($421 million), compared with a revised 15.3 billion koruna in June and a 1.6 billion-koruna deficit a year ago.

Czech Real Wage Growth Slows Further In Q2 2008

Czech real wages grew at the slowest pace in almost 10 years in the second quarter, helping reduce concern that inflation will get stuck above the central bank's target range. The average salary rose by 8%, which meant a rise in real wages of 1.1 percent when adjusted for 6.8 percent inflation, compared with revised growth of 2.6 percent in the first three months, according to data from the Prague-based statistics office last week. The average gross monthly paycheck jumped to 23,182 koruna ($1,387) after a revised 10.2 percent rise in the first quarter.



The central bank, which on Aug. 7 cut its key interest rate for the first time in three years, mentioned strong wage growth one of the factors that could frustrate its aim of reducing the inflation rate to its 3 percent target range next year.


The central bank is watching closely to see whether the current inflation spike, which they expect to wane during 2009, will lead to faster pay increases than justified by productivity gains, providing a second-round impulse to price growth.

The lowest jobless rate in 11 years, a record number of vacancies and tax optimization pushed first-quarter wages up the most in more than 9 years. The government introduced a flat income tax rate on Jan. 1, replacing four progressive rates, leaving most workers with more net pay in their pockets.

Among private businesses, the monthly paycheck was 9.3 percent higher, at 23,692 koruna. When adjusted for inflation, wages grew 2.3 percent, while the salaries of state employees jumped on average 3 percent to 21,344 koruna, translating into a 3.6 percent drop in real terms after the government capped public wage gains to restrain spending.

Czech Economy Continues To Slow In Q2 2008

The Czech economy expanded at what was effectively the slowest pace in four years in the second quarter of 2008, although it was perhaps just a touch faster than I personally had been expecting. Gross domestic product grew 4.5 percent, compared with a revised 5.1 percent in the previous quarter, slackening for a fourth straight quarter, according to data from the Prague-based statistics office.


Ostensibly the economy continued to maintain the same 0.9% quarter on quarter expansion pace as in the first quarter, but that may be slightly deceptive, since the early calendar position of Easter this year has meant that in most European economies activities from March have been passed through to April without the statistics offices seasonal adjustments being adequately able to capture the effect. So my feeling is that with a better seasonal correction we would find that the economy expanded rather faster in Q1 and rather slower in Q2, but in any even hardly by an earth shattering value.




The only clue we really have while we wait for the detailed breakdown from the statistics office on 10 September is that the trade surplus may well have played a significant part. Exports of goods in current prices rose 4.6 percent in the three-month period ending June 30, down from 5.7 percent in the first quarter, but slowing domestic demand has meant that imports slowed even more rising by only 2.7% year on year in the second quarter. The three-month goods trade surplus shrank to 31.4 billion koruna, compared with 33.025 billion koruna in the first quarter, according to the statistics bureau's Aug. 4 report so really at the end of the day we are all just guessing here.

Czech Producer Prices Rise Again In July While Retail Sales Expand Slightly In June

Czech industrial producer prices increased by 0.1% m-o-m in July and by 5.2% year on year. Prices went up the most significantly in ‘basic metals, fabricated metal products’ by 1.8%, in ‘chemicals, chemical products and man-made fibers’ by 1.7% and in ‘food products, beverages and tobacco’ by 0.4%, mainly in ‘animal and vegetable oils and fats’ by 2.8%. Prices went down particularly in ‘coke, refined petroleum products’ by 1.6% and in ‘transport equipment’ by 1.3%.



In June 2008, export prices decreased by 1.8%, import prices by 1.2%, month-on-month. Year-on-year, export prices fell by 8.1% and import prices by 5.7%.


Retail Sales

In June, seasonally adjusted retail sales (except automotive) grew by 0.4% month-on-month at constant prices and by 2.7% year-on-year (not seasonally adjusted by 1.4%). The biggest contribution to the growth of sales came from the sale of furniture, lighting equipment and household articles, electrical appliances, radio and television goods, hardware, paints and glass in specialized stores. In the automotive segment, seasonally adjusted sales increased by 1.7%, m-o-m, at constant prices, by 2.9% year-on-year and not seasonally adjusted by 2.6%. SA sales in hotels and restaurants dropped by 0.6%, m-o-m, and NSA sales were 2.7% down, year-on-year.

Czech Inflation Sneaks Upwards Again In July

Czech inflation accelerated in July for the first time in six months on higher prices for natural gas, cigarettes and holiday packages. The inflation rate climbed to 6.9 percent from June's 6.7 percent, according to data from the Prague-based statistics office earlier today. Month on month, consumer prices rose 0.5 percent following 0.2 percent growth in June.

Ceska Narodni Banka Drops Its Interest Rate

Now this is news. Monetary policy makers at the Ceska Narodni Banka (the CRs central bank) cut what is the European Union's lowest key interest rate to 3.5 percent at today's meeting. This was the first decrease in more than three years, and was evidently an attempt to counter the koruna's record appreciation in order to try to revive economic growth which is fading rapidly.

Rate setters seem to have decisively switched their focus from the current high levels of inflation to countering the koruna's 13-month rally on concern a high Koruna will continue to have a negative impact on exports, investments and employment. Central Bank Chief Zdenek Tuma warned last month that the koruna's recent advance could cause inflation to undershoot the central bank's 3 percent target next year, justifying the then hypothetical possibility of rate cuts. Since then, the koruna has lost 4.1 percent against the euro.



The central bank lowered its forecast for economic growth for this year to 4.1 percent from the previous 4.7 percent outlook. In 2009, economic growth the bank expect growth to decelerate further - to 3.6 percent - which compares with the 6.6 percent rate achieved in 2007. So the bank is worried that the economy is slowing excessively quickly.


In fact the Czech economy expanded at the slowest pace in more than three years in the first quarter as consumer spending weakened. Gross domestic product rose 5.3 percent, compared with a revised 6.3 percent in the previous quarter. The economy's rate of expansion slowed for a third consecutive quarter after peaking at a record 6.8 percent in Q2 2006.



If we look at the q-o-q chart we can see the slowdown even more closely. Basically the economy hit a quarterly 1.8% in Q1 2007, and since that time it has been slowing to Q1s 0.9% (or an annual rate of 3.6%). Clearly Q2 will be weaker and we could see q-o-q of 0.5%, which mean if the rate of de-celleration continued we might get negative growth in Q4. This would clearly be a soft landing, but it is preoccupying for an emerging economy nonetheless.



The inflation rate increased to 6.9 percent in July from June's 6.7 percent, surpassing the central bank's goal for the 10th consecutive month. The CR now has negative interest rates of some 3.4 percent. That is, monetary conditions in the CR are extremely accommodative.


And wages have been rising much more rapidly than prices in recent months, that is real wages have been rising.

Which is not really surprising, since the labour market has been steadily tightening as the number of unemployed has dropped steadily. Which makes the issue of why consumption has been falling back much more of a mystery. This situation is very different from what we are seeing at present in Bulgaria or Romania, or even Slovakia.



Now it is not hard given the sharp rise in the Koruna to understand why Czech exports slowed significantly on a year on year basis in June. They were up a touch on May, but down on April and February, and were only very slightly up y-o-y. Exports rose an annual 1.7 percent, to 215.8 billion koruna and imports totaled 201.9 billion koruna, a 1.1 percent decline in the year.



But why is consumer demand slowing at this point? This is much harder to understand, yet it is. Why are people not simply borrowing cheap money and building houses and buying cars? Seasonally adjusted retail sales, however, only grew at a very moderate rate in May (up by 0.6% month-on-month and by 2.5% year-on-year).



And the construction boom is long since over, with output actually contracting year on year in May. Indeed the last construction boom seems to have blown out in Q1 2007.



Now this is all frankly rather worrying, and it is doubly worrying for me, because I think I have seen this before in Portugal and in Hungary. The rising Koruna may well choke exports but there is no reason whatsoever why it should be choking domestic demand, indeed quite the contrary. So why is domestic demand so weak, that is the question?

If we look at a longer term chart for year on year household consumption growth, we will see that the last "long wave" of this peaked in Q1 2007. We can expect the performance in Q2 2008 to be even worse, and the question, the quite deep theoretical question really, is why this should be happening?



Now here's a rather similar chart for Hungary. As we can see, Hungary had it last local peak in Q1 2006.


And as we can see, Portugal's last big "wave" ended in Q1 1999. So my question is really, is it possible that the CR is now where Portugal was in Q1 1999 and where Hungary was in Q1 2006? My feeling is that it is possible, and indeed this is where we may well now be. The thing is we need to understand the theory which explains the dynamics behind all this much better. But if it isn't like this, then I don't understand why consumption is now simply fading out.




Basically one thing that these three countries have in common is declining population (or at least in the Portuguese case declining population at the time when consumption blew, as a result of prior EU freedom of movement related out-migration). Declining and ageing population. As we can see in the first chart, the population of the CR has declined in a variety of ways since the late 1980s. It has started to increase again since 2004, but it seems to me the consumption bust was already in the pipeline by that point. What is really, really surprising to me is just how sensitive the whole system is to what appear to be really quite small movements in population size.


Of course it isn't simply the size that matters, it is more the structure, and as we can see from the median age chart below the CR has been ageing quite rapidly for some time now, and will continue to age as we move forward. Having more children and accepting more immigrants (both of which are very advisable) are the only things which will slow all this down.




Of course you won't read about any of this in the economics text books (yet), but the picture is reasonably clear, and it is also perfectly compatible with life cycle savings and consumption model as presented by Franco Modigliani. You simply need to apply it to population rather than simply to individuals.

Where Now for CEE and Baltic Currencies?

By Claus Vistesen: Copenhagen

Ever since the illusive credit turmoil began sentiment in the market place has been fickle and essentially, like the assets of which it consists, volatile. We started off with an adamant focus on downside risks to growth which then turned into a focus and fear of inflation. Now, as the cyclical data has turned for the worse in Europe and many places in Asia the focus seems to be reverting to growth. Now, I won't go into the whole decoupling v recoupling discussion at this point since I think that this dichotomy is a false one. It never was about de-coupling à la traditionelle but moreso about two interrelated points. The first would be the extent to which the world already has decoupled from the US in the sense that a key group of emerging economies are now set to ascend in economic prowess. The second would be the extent to which the de-coupling thesis always built on a fallacy. The main point would be that the main fault line of slowdown was observed across economies with external deficits; something which, I am sure most will agree, is sure to impact surplus economies too.

Now, that does not completely let the ECB off the hook since by maintaining a focus on inflation it also assumed the role, if only temporary, of the new anchor in a re-wamped version of Bretton Woods II as the Euro ascended to new highs. This bet on global re-balancing was always going to end in tears and in this light the Eurozone could not decouple from the US; that much, I think, is true.

The key issue here however, as I have argued time and time again is represented in two crucial interlocked questions which together form a key structural trend in the global economy. One is what happens when the surplus economies slow down and there is not sufficient demand to pull the economy back up? Demographics and a high median age are key variables to watch in this regard. The second question is the extent to which hitherto deficit nations can turn the boat around and increase savings (i.e. rely more on exports) and what it will mean for global capital flows when they begin this process?

In the context of the CEE economies the themes above are also present. In a recent note I detailed the change in sentiment from growth to inflation and what it might mean for Eastern Europe's economies and their respective currencies. The key situation as I sketched it was one of a dilemma.

On the one hand, the rampant inflation levels suggest that the exchange rate be loosened to allow appreciation and thus pour water on the roaring inflation bonfire. On the other hand however the Baltics, as well as many other CEE countries, are saddled with extensive external deficits financed by consumer and business credit denominated in Euros. It is not difficult to see that this represents a regular vice from which it will be very difficult to escape since as long as the peg remains deflation seems the only painful alternative as a mean of correcting.

(...)

Another point which is specifically tied to Eastern Europe is that if domestic nominal interest rate increase to keep up with inflation rates it will have a strong substitution effects towards Euro denominated loans. This can become a dangerous cocktail should the tide turn against the currencies.

Now that the focus seems to be changing back again it appears to be a good time to revisit the situation

Within this global nexus of what exactly to do with inflation relative to growth, many Eastern European economies has so far opted to go for inflation by raising interest rates. At an initial glance this seems quite reasonable and in many ways the CEE central banks merely latched on to market sentiment and expectations that many emerging economies would seek to use nominal appreciation as a tool to flush out inflation.

Consequently we have seen how both Ukraine and Hungary have chosen to loosen the peg to the Euro as well as other floating currencies in Eastern Europe have seen their yield advantage increase in an attempt to flush out inflation. This has not been without problems though or more specifically it is not clear that an appreciation of the currency is all for the good. Two points here would seem particularly important. One is the simple question of whether in fact an appreciation is deflationary in a world where capital flows, and in particular the hot kind, act strongly on yield. However, another point would be specifically tied to the situation in Eastern Europe. As such, nominal appreciation of the currency also increases the purchasing power which is not what many CEE economies need at the present time as they stand before the task of correcting a rather large external balance. Moreover, rising domestic interest rates will increase and exacerbate the credit channel by which loans denominated in Euros and Swiss francs become more attractive. I have shown this to be true, for example, in the context of Lithuania. The important thing to do note here would what would happen to the servicing of these liabilities should the domestic currencies depreciate.

What happens next then? Or more concretely, even though CEE currencies, in general, have enjoyed a rally on the back of market expectations of nominal appreciation fed by hawkish central banks what happens if and when central banks reverese course?

An initial warning shot across the bow was handed to us as the governor of the Czech central bank mused that he might lower rates come next meeting due to the strenght of the Koruna and the subsequent effect on exports. Also Poland recently opted to abandon the hawkish stance as rates were kept steady. In light of this event Macro Man managed, as ever, to hit the proverbial nail on the head.

There is little more bearish for a currency these days than abandoning the inflation fight in a pursuit of growth; this is particularly the case when the market is heavily positioned the other way.

This is exactly the issue which now confronts many Eastern European economies. What to do as growth visibly tanks at one at the same time as inflation stays high. One thing here would be for the central banks to hold their raising cycle which in itself should ease the pace of appreciation but what if they need to lower rates.




Now the numbers above do not, in themselves tell anything remotely interesting. For one, the difference between the economies are quite big. For example the Czech Republic has been able to gain, with a comparatively low interest rate, currency appreciation which has actually helped the external balance in so far as it has made imports cheaper. Obviously, at this point the benign effect on the trade balance is just as much down to decreasing domestic demand as the value shield of a dear currency. On the other hand, if we consider especially Ukraine, Romania, and Hungary the price has been dearer and the subsequent effect on inflation less pronounced. One could always argue that the situation would have been much worse, but one thing is certain; the ensuing loss of competitiveness has not been compensated for with a decrease in inflation. And one has to wonder whether pushing nominal interest rates ever higher would be a sound solution.

The key here is that these high interest rates carry with them a high lock-in premium which makes it difficult to reduce them without causing substantial pain to the currency. Add to this that as long as interest rates stay in this territory the incentive to borrow in foreign currency remains very appealing. In fact, the incentive structure here is quite disruptive as many of these economies have higher rates on domestic currency deposits and lower rates on foreign credit. This incites consumers and companies to place their deposits in local currency while funding themselves in foreign currency. Finally, there is of course the more standard economics 1-0-1 point that whatever nominal rate is ascribed to a currency and an economy the latter needs to be able to provide the structural demand for which to satisfy the yield. Otherwise you just pour more gasoline on an already raging bonfire.

Obviously, as long as the local currency remains strong and on an upwards march or the trading band is kept in place the show goes on. But the longer this structure lingers the more difficult it will be to break free; and break free they must since I am quite sure that Eurozone membership is off, for the immediate future at least.

Another more hard hitting point would simply be that whatever growth momentum these economies had going into 2008 it is now steadily levelling off. Now, these economies need to rebalance their external accounts at the same time as they labour under the yoke of slowing growth, high interest rates which are difficult to reduce and/or a quasi fixed exchange rate to the Euro. Can you feel the chilling cold of deflation blowing across the Urals? I can.

Basically, the past years' rapid process of nominal convergence will now need to be kicked into reverse, since it is quite obvious that many CEE economies have been riding a blade too tough.

Be Careful Indeed

Last time I massaged this specific topic I summarised by ominously stating that the CEE economies and their central banks should be careful what they wished for in terms of using higher interest rates and subsequent nominal appreciation of their currencies to flush out inflation. The key point was that the effect would likely be limited and only further worsen the imbalances in the economies. And thus, here we are.

Another more subtle point in the context of market reactions would be the boomerang effect which comes from the currency appreciation as interest rates are increased (and the peg/band abandoned) to the subsequent plunge when the economic tide turns. In line with the change in global sentiment towards growth and deflation (see e.g. here) and the fact that other hitherto strong yielders (e.g. the Kiwi and Aussie) are beginning to falter we may be at an inflection point in the whole discourse of upwards movement in CEE currencies. Stephen Jen's recent tour of global FX markets is a fine addition to this argument.

As ever, this is obviously still a dilemma for most of these economies since inflation continues to rage ahead. In Romania for example the PPI rose at its highest pace since 2004. However, as long as the credit tap stays open and as long as the purchasing power is increasing so will the the demands for higher wages stay strong. This is particularly true in the context of the CEE economies as these are in possession of structurally broken population pyramids after two decades worth of lowest low fertility and, in the cast of the latter decade, net outward migration.

The main point I would like to emphasise here is that correction is coming and that it will only become harder the higher the currencies move upwards. In a more general light this correction will not be a small one and it most certainly will not be felt exclusively in Eastern Europe. Basically, the big hidden data point in all of this is the dependence of Germany on CEE imports. So far, this has moved along just nicely but Germany is in for a rude awakening once the link breaks ... and break, I am afraid, it will.

Exports From The Czech Republic Slow Further In June

Czech exports slowed further on a year on year basis in June. They were up a touch on May, but down on April and February, and were only very slightly up y-o-y. The Czech economy is slowing visibly now, but could we also deduce we are going to see a very slight increase in German exports in June (over May) when the data are released later this week? Are movements in industrial output and exports in the CR now an early indicator for the German economy?

Exports rose an annual 1.7 percent, to 215.8 billion koruna and imports totaled 201.9 billion koruna, a 1.1 percent decline in the year.



The Czech Republic's trade surplus increased in June as weaking internal demand kept a lid on imports. Exports exceeded imports by 13.9 billion koruna ($905 million), compared with a surplus of 9.2 billion koruna in May and 8.1 billion koruna a year ago, according to the Prague-based statistics office earlier today

The koruna has been the world's best-performing currency so far this this year - advancing 17 percent against the euro and was 33 percent stronger against the dollar. The currency's sustained appreciation lowers the chances that the CR will see a rapid rebound in exports as the high value of the currency is now beginning to seriously weigh on exporters.

Czech Retail Sales May 2008

Seasonally adjusted retail sales rebounded slightly in May, growing by 0.6% month-on-month and by 2.5% year-on-year. Seasonally adjusted car sales increased by 0.7%, m-o-m, at constant prices, by 1.3% year-on-year and unadjusted (NSA) sales dropped by 1.5%. SA sales in hotels and restaurants increased by 0.2%, m-o-m, and NSA sales dropped by 0.3%, year-on-year.




The evidence for a slowdown in the Czech Republic is now really quite extensive.

The biggest contributors to the total sales increase were retail sale of furniture, lighting equipment, household articles, electrical appliances, radio and television goods, hardware, paints and glass in specialised stores and sale of food, beverages and tobacco predominating in non specialized stores. The most rapid growth was recorded for sales from the sale of textiles, clothing, footwear and leather goods and the sale of furniture, lighting equipment and household articles, electrical appliances, radio and television goods, hardware, paints and glass. The biggest drop of sales was recorded for retail sale of food, beverages and tobacco in specialized stores (-5.4%), retail sale of second-hand goods in stores (-3.3%), sale via stalls and markets and other non-store retail sale (-2.7%) and the sale in stores with pharmaceutical and medical goods, cosmetic and toilet articles (-1.3%)

Czech Producer Prices June 2008

Czech industrial producer price inflation accelerated in June, and a record rally by the koruna failed to eliminate the impact of soaring oil costs. The price of goods leaving factories and mines grew 5.3 percent from a year ago, compared with a 5.2 percent rate in May, the Prague-based statistics office said today. And this despite the koruna's 22 percent annual gain against the euro and 39 percent rise versus the dollar.

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.