May confidence in the economy: despite all the setbacks, we're moving on
Economic commentary by Jaromir Šindel, Chief Economist of the CBA
The May survey brought a recovery in economic sentiment across almost all sectors, which was also reflected in stronger employment expectations. The survey also highlighted the potential risk of higher prices due to tariff wars, which was behind the still relatively higher price expectations in May. The improved sentiment suggests upside risk to our forecast for GDP growth in Q2, or to the outlook for a slower 1.7% y/y recovery in the Czech economy this year. This and improved employment expectations, together with higher price expectations, support a pause in the CNB's interest rate cut, which we expect to continue with a drop in the CNB's two-week repo rate to 3.25% in August.
Economic sentiment improved in May, particularly in services and consumer confidence, where confidence returned to one-year highs. While consumer confidence returned slightly above its long-term average, it rose significantly higher in services. This was on top of strong confidence in construction, which had deteriorated slightly in May (temperature swings probably negatively impacted production assessments in recent months). The industry has moderated after April's tariff cold shower, but its confidence has remained around normal levels seen over the past two years, and ongoing US-EU tariff negotiations will leave volatility in expectations in place heading into the summer months. Sentiment on trade has deteriorated but from relatively high levels and consumers' plans for large purchases remain unchanged (see third chart).
The improvement in sentiment also translated into better employment expectations across the economy (see Figures 4 and 5), driven mainly by services but also by the strong performance of the construction sector and the recovery in industry. This could result in a stabilisation of the registered unemployment rate, which reached a seasonally adjusted 4.3% in April. However, this is not yet reflected in persistent household concerns about labour market developments, which may represent a drag on wage bargaining and household consumption (which should be the drivers of GDP growth this year and next).
Unsurprisingly, then, price expectations remain relatively higher, at least reminding us that April's slowdown in consumer price growth to 1.8% y/y was temporary. On the positive side, price expectations for services have fallen. Here, however, the question is how permanent this decline will be in view of the recovery in the services sector and in the employment segment. In contrast, industry surprised with a stronger increase in price expectations amid a decline in commodity prices. This suggests a stagflationary perception of higher tariffs in foreign trade; hence their negative impact on productivity at higher prices. This impact was partly the subject of the CBA survey, where we were interested in a possible additional disinflationary impulse from the fall in import prices due to the US-China trade wars. However, expectations of this possibility do not prevail among bank analysts (see page 4 of the presentation at the end of the May Outlook for more on the CBA survey).
