Manufacturing fell in June, temporarily due to the energy sector, while construction and foreign trade represent a positive boost to growth, including wages
Economic commentary by Jaromir Šindel, Chief Economist of the CBA
Six main findings:
- June's 1.1% decline in industrial production reflects a temporary slump in the energy sector.
- Weaker performance was also recorded in energy-intensive industries, where a rising volume of construction orders should provide a positive boost.
- A strong rebound in the automotive industry in June translated favourably into a higher foreign trade surplus, the strongest since September last year. Foreign trade is on track for a 2.7% GDP surplus after 2.4% last year.
- This supports the summer strengthening of the crown, which has also benefited from higher interest rates due to persistent inflationary pressures. June's industrial wage data does not change this story, but it does reinforce the need for stronger productivity gains.
- The weak June industrial performance corresponds with surprisingly low GDP growth of 0.2% in Q2. However, foreign trade and construction may lead to a slight upward revision.
- Wage growth continues to support the consumption-driven recovery, while July sentiment indicators slightly increase uncertainty about future developments in industry and exports.
Industrial production declined by 1.1% m-o-m (seasonally adjusted) in June, driven by a significant but temporary drop in production in the energy sector. At the same time, there was a deterioration in performance in energy-intensive industries, which could be mitigated in the future by the continued expansion in construction output.
Construction maintained its strong growth in June, rising by 2.6% month-on-month. Year-on-year, its momentum accelerated to 13%, setting the stage for strong expansion in Q3 as well - its current level suggests construction growth of around 2.4% q-o-q.
This is not the case for industrial production, which slowed its annual dynamics to zero in June. This was not prevented by the almost 4% y-o-y increase in automotive production thanks to a strong June month-on-month recovery of more than 5% (after a 3% May drop).
However, the positive impact was reflected in foreign trade, with exports up 1.1% while imports rose by only 0.4%, leading to a strengthening of the trade balance. The foreign trade surplus widened to CZK 22 billion in June despite a slightly worse energy balance (- CZK 18 billion). The good news is also the continuing trend of a smaller deficit in foreign trade excluding cars and energy, which eased to CZK -14.5 billion in June compared to an average deficit of CZK 28 billion in the first quarter.
June's weakness in industry fits in with the weak 0.2% quarter-on-quarter GDP growth in the second quarter, which also reflected April's drop in construction output. On the other hand, improvements in foreign trade and construction suggest the possibility of a modest positive revision to GDP. July's confidence indicators, however, did not add much to optimism - they provided weaker signals for both the real economy and the CNB's monetary policy.
Despite a more than two-year decline in industrial employment of 2% y-o-y, we are seeing continued solid growth in average wages. I estimate that its quarter-on-quarter growth accelerated to 2.8% in Q2 (vs. 1.4% in Q1). While monthly wage data show volatility, the nearly 7% year-on-year growth in average wages in Q2 confirms that the contribution of domestic demand and wages to GDP growth persists.
At the same time, however, this dynamic underlines the need to accelerate labour productivity growth - without it, the persistent price pressures in the labour market cannot be alleviated. Although the demand side of the economy remains strong, the balance is not at risk, mainly due to the growing external trade surplus.
Note: Unless otherwise stated, we use seasonally adjusted figures in the text. Annualized developments show possible year-on-year growth in the annual outlook if current month-on-month dynamics were to be maintained.