Worse April sentiment does not bring immediate relief for the CNB
Economic commentary by Jaromir Šindel, Chief Economist of the CBA
April brought a deterioration in economic sentiment across sectors, with the exception of construction. Both are understandable in view of Trump's tariffs, which may significantly reduce economic growth with disinflationary effects, and in view of the situation on the Czech property market and planned pre-election investments. The weakness in sentiment is reflected in weaker employment expectations, which should lead to a further increase in the registered unemployment rate (4.2% y/y in March vs. a still lower general unemployment rate).
However, the April sentiment survey does not just present a negative picture, which would lead to an immediate easing of inflationary pressures and create more room for a quick CNB rate cut. This is because of the 6 factors I discuss below. Foremost among these are higher capacity utilization, still rather inflationary limits, also consumer appetite for a recovery trajectory, and price expectations above the CNB's inflation target dynamics.
Despite the weaker sentiment in April, its details accentuate for me the fact of a strengthening momentum in core inflation, which is above the tolerance band of the CNB's inflation target. Unless a cold data shower comes in early May and there is further loosening of Trump's tariffs on China, I would expect the CNB to leave the interest rate at 3.75% at the May meeting.
April's deterioration in economic sentiment combined with worse employment expectations
However, the following factors block early disinflationary relief:
Factor 1: weaker industrial demand, but other barriers are gaining strength as production capacity is used more
Despite the worse assessment of industrial demand, there was a surprising slight correction in the assessment of insufficient demand as the main barrier to industrial growth. Moreover, we observe an increased utilisation of production capacity (see chart below left). The assessment of the size of production capacity is moving in the same direction (see chart below right). I do not read this as a disinflationary signal.
Factor 2: Other obstacles to growth in the economy remain more inflationary
Moreover, the obstacle of insufficient demand has eased in services and construction. Although the problem of underemployment has eased in industry and also in services (where it remains above the long-term average), this is not the case for construction. This development seems to me to be in line with employment expectations in these sectors. Moreover, both industry and construction remain above the long-term average in terms of material/equipment shortages.
Factor 3: weaker industrial demand vs. solid export expectations
Industrial sentiment deteriorated due to an understandable drop in growth expectations, but export expectations remained high. If we add other sentiment indicators to Czech sentiment, including foreign ones (PMI, Germany, euro area), then there is no stronger signal for a change in the recent "off-trend" industrial production (see chart below right).
Factor 4: Monthly data still signal strong GDP growth for Q1
The lower economic sentiment is still consistent with a growth rate that is not inconsistent with the consensus expectation of economic growth prior to Trump's tariffs. Moreover, available economic data for February suggest rather stronger GDP growth in the first quarter of this year. To this we can add the still solid industrial wage growth at the beginning of the year (see analysis here).
Factor 5: Consumer appetite for shopping remains on a recovery trajectory
Factor 6: softer price expectations, but still above the dynamics of the CNB's inflation target
Price expectations fell slightly in April, but still not towards the inflation target. Although price expectations in the construction sector corrected their March increase, together with price expectations in services, they are no closer to the inflation target. The two segments close to core inflation have been on an accelerating trajectory in recent months (see inflation commentary for more details).
