May sentiment cooled household purchase plans
Slightly worse sentiment in May hides a drop in expected large purchases by consumers. If they translate into worse retail sales results in the coming months, these more modest plans would pose a downside risk to the 2% growth outlook for the Czech economy this year. This is based on a stable growth of almost 3% in household consumption. Other details reveal a slight correction in price expectations, which mitigates upside risks to inflation. The labour market receives a neutral report given its recent trend, i.e. slightly negative.
The slight deterioration in May economic sentiment hides a deterioration in sentiment not only in industry. The price shock has cooled consumers' appetite for big purchases. Now including planned ones, which has also translated into a drop in business sentiment. By contrast, confidence in services has remained broadly unchanged in recent months and in construction reached a year's high in May.
In terms of long-term trends, confidence in construction is well above average, while consumer confidence is only slightly above the long-term average, which is also true for the more stable services. In contrast, industrial confidence remains below the long-term average but still slightly above the average of the last two years. However, this is not the case in trade, where sentiment has fallen to two-year lows.
Price expectations have eased slightly, reflecting three factors in particular. These are their stabilisation in the industry and among consumers. A milder downward correction in the construction sector is then slightly correcting the risk to imputed rents. This is further complemented, in the case of the impact on core inflation, by a fall in price expectations in services, which may bring relief to core prices. If this scenario materializes, this, together with weaker consumer purchasing plans, may limit the second-round effects of the energy price shock on inflation and thus mitigate the need for a central bank rate hike.
Worse sentiment was also reflected in slightly worse employment expectations. But not in trade or industry, but rather in services. The slightly worse expectations here bring a neutral message for the recent trend of a gradual increase in registered unemployment, a slightly negative message.
