June sentiment brings mostly encouraging news for growth, labour market and core inflation
Economic commentary by Jaromir Šindel, Chief Economist of the CBA
While industry sentiment remains weak, it has stabilized at better levels than we saw at the time of President Trump's tariff wars. This has exceeded expectations and eased concerns about a possible slowdown in activity due to the previous intense "frontloading" by US customers. Czech industry is benefiting from improved industrial and export expectations to the west.
The positive developments are complemented by an improvement in sentiment in the construction sector, suggesting that the April decline in output was more of a one-off blip.
In the labour market, negative expectations continue to ease, which may herald a stabilisation of the negative trend in registered unemployment, whose seasonally adjusted share rose to 4.4% in May.
Inflation expectations also retreated in June, in two notable circumstances:
- There was a more pronounced decline in price expectations in services, which could bring relief in core inflation (see "Chart Report" below).
- In contrast, price expectations in retail trade have risen, despite a general deterioration in business confidence in this segment.
Although sentiment in services fell slightly, this was more of a correction after the improvement in May, with confidence remaining above levels at the start of the year.
Alongside the positive news, however, the June survey also revealed weaknesses: industrial confidence remained subdued and sentiment in the retail sector had fallen further, mainly due to a negative assessment of the current situation and increased inventories. Nevertheless, price and employment expectations have risen, while consumer plans for larger purchases have improved, easing concerns about the negative impact of weaker sentiment in trade on our outlook.
What does this imply?
The current data support upside risk to our forecast of 1.7% y/y GDP growth - the first quarter results move it closer to 2%. The improved economic activity is also reflected in a more positive assessment of the labour market. This development supports the stance of CNB board member Jan Kubicek, who did not vote for a further cut in the CNB interest rate to 3.5% in May and signalled before the June meeting that the economy does not now need further monetary policy stimulus (Bloomberg, 18 June 2025). This increases the likelihood of a pause in the monetary easing cycle (from a 7% CNB interest rate in November 2023 to 3.5% in May 2025).
If strong price momentum in core inflation (annualized growth of over 3.3%) persists and the economy continues to outperform expectations, this pause could last longer than one monetary policy meeting. Conversely, if the signal from lower price expectations in services materializes, then this could indeed be a temporary pause in rate cuts - not a definitive end to them. However, this would also require wage growth to moderate relative to productivity, which current data do not yet suggest.
Confidence in the economy according to the June CSO survey. According to the monthly survey, overall confidence in the Czech economy remains close to the long-term average. It declined slightly month-on-month but remains higher than in the previous three months and also better than in the same period last year.
The sub-views show the following:
- Industry and trade: confidence below the long-term average.
- Households: close to the average level.
- Services and construction: above the long-term average.
In more detail, the sectoral dynamics show that:
- Household confidence weakened compared to May but is still higher than in the previous three months; however, it is slightly weaker year-on-year.
- In industry, sentiment has improved from last month and the three-month average and is also better than last year.
- In services, there was a decline from May, but levels remain above spring levels and have improved year-over-year.
- In trade, sentiment weakened compared to the previous month and the average of the past three months, but is still above last year's level.
- In the construction sector, confidence has increased compared to both May and the previous month and 2024.
