June sentiment brings mild optimism for growth, but warns on inflation and the labour market

Economic confidence improved slightly in June. Stronger sentiment among households and manufacturers outweighed continued weakness in retail trade, although retail conditions may improve over the coming months. At the same time, the services sector points to higher risks for both unemployment and core inflation—that is, inflation excluding the volatile prices of energy and food. For the Czech National Bank (CNB), the June sentiment survey suggests a need for caution, reflecting stronger household demand and a renewed rise in price expectations in services.
June sentiment brings mild optimism for growth, but warns on inflation and the labour market ilustrační foto

Overall economic confidence edged higher in June, supported by a modest—but not dramatic—improvement in household and industrial sentiment. In manufacturing, the increase was driven mainly by better assessments and expectations of foreign demand. By contrast, expectations in retail trade deteriorated further despite households reporting stronger intentions to make major purchases. However, more detailed survey indicators, including retailers' expectations and supplier-related data, suggest that conditions in the sector could improve in the months ahead.

Although confidence in the services sector remains stable and slightly above its long-term average, weaker employment expectations in services contributed to a modest deterioration in the overall labour market outlook. As a result, seasonally adjusted registered unemployment is likely to exceed the 5% threshold (see charts here). The key question, however, will be whether the Labour Force Survey unemployment rate, which has recently remained stable at 3.2%, starts to follow the same trend.

Negative signals for core inflation? While the combination of stable business confidence and weaker hiring expectations in services could eventually support a recovery in labour productivity, price expectations in the sector have moved back to elevated levels. As a result, the services sector is not providing the encouraging signal for core inflation that policymakers would like to see.

This is compounded by persistently elevated price expectations in construction. These remain below the levels seen in April, when they were pushed up by higher oil prices, but they continue to point to underlying inflationary pressures. It remains to be seen how quickly these expectations will ease over the summer as the earlier commodity price shock continues to fade.

A mildly positive signal for economic growth, provided that the improved expectations in manufacturing and retail trade materialise.

Price expectations in services and construction are likely to remain a concern for the CNB.

The labour market outlook has weakened, particularly due to softer employment expectations in services.

Retail trade could find support from households' solid plans for major purchases.