A slight deterioration in economic sentiment is not a signal for lower interest rates

Economic sentiment in August deteriorated slightly and fell just below this year’s average. However, it still points more toward a gradual recovery of the Czech economy than a significant slowdown. Consumer and business confidence, in particular, took a turn for the worse, with expectations for future economic developments deteriorating. By contrast, industrial confidence improved slightly, and employment expectations have been rising for the second month in a row. From the CNB’s perspective, the combination of improved labor market expectations and heightened price expectations—particularly in the services sector—remains significant and will continue to warrant a hawkish stance.
A slight deterioration in economic sentiment is not a signal for lower interest rates ilustrační foto

Economic sentiment in August deteriorated slightly and fell just below this year’s average. Overall, however, it continues to be consistent with the scenario of a gradual recovery of the Czech economy (see the new CBA Forecast). The trends in individual sectors of the economy, however, vary considerably: while manufacturing improved slightly but remains below the long-term average, consumer sentiment and purchasing plans have weakened. And although it remains stable, sentiment among retailers has weakened again. By contrast, sentiment in the services and construction sectors remains above the long-term average, with no significant change.

In manufacturing, confidence rose slightly in August, although it remains below its long-term average. A particularly positive sign is the continued improvement in employment expectations. This suggests that businesses do not yet anticipate a significant deterioration in the situation and that the industrial sector may gradually stabilize after a weaker period.

The opposite picture is seen in the retail sector and among consumers. Confidence in the retail sector has returned to very weak levels, primarily due to a more pessimistic assessment of the expected situation in the coming months. Consumers are also more cautious. They have slightly scaled back their plans for major purchases, and their assessment of the future economic situation has worsened. Nevertheless, purchasing intentions remain at levels that still point to solid growth in retail sales.

Expectations for the labor market have improved slightly despite consumer concerns. At the same time,households’ concerns about unemployment have risen slightly. From the perspective of the economy as a whole, however, the signals from the labor market are not unequivocally negative. Employment expectations improved for the second month in a row, particularly in services and manufacturing; the construction sector also saw a slight improvement. Retail remains the exception.

Price expectations continue to send a hawkish signal regarding monetary policy. Although they continued to declinein the retail sector, the overall picture remains less favorable. Price expectations rose among consumers and in the services sector. In construction, they stabilized at a still relatively high level, and increased cost pressures are also evident in manufacturing, where higher energy prices, among other factors, may be having an impact.

For a closer look at sentiment in terms of bottlenecks or higher capacity utilization, see the analysis of the July quarterly survey (July Sentiment Will Please the CNB, but a More Favorable Outlook Will Be Undermined by Higher Oil Prices). June economic data remained solid (Four stories from the June data: energy, exports, wages, and housing starts), which resulted in slightly better GDP growth in the second quarter (The Czech economy accelerated slightly, but growth remained below the CNB’s forecast).