Domestic industry faces weak demand

Economic commentary by Jakub Seidler, Chief Economist of the CBA
Domestic industry faces weak demand ilustrační foto
The Purchasing Managers' Index (PMI) in industry rose slightly to 43 points in January from 41.8 in December, but it remains noticeably below the 50-point threshold, indicating deteriorating conditions in domestic industry. The manufacturing industry's entry into the new year continued to be marked by a decline in new orders and production due to weak domestic and foreign demand. Given the fall in input prices and weak demand, respondents then indicated one of the sharpest falls in output prices in 14 years in January. The early leading PMI indicators generally suggest that manufacturing remains in the doldrums from the edge of the year, although firms believe that demand will improve by mid-year. For the CBN, today's readings may be another supportive argument for it to proceed with a 50-point rate cut next week.

According to the S&P Global survey, conditions in the domestic manufacturing industry have deteriorated further noticeably compared to the end of last year. A noticeable decline in new orders continued, which respondents rated as one of the most significant in the past year. This was attributable to weaker domestic and foreign demand. As a consequence, production fell for the twentieth month in a row. According to the respondents, the decline in input prices continued, which, together with lower demand and efforts to increase competitiveness, led to a fall in output prices that was one of the most significant since the beginning of 2010. Weaker orders and production then led to a reduction in the workforce in an effort to cut costs, including from the ranks of permanent staff. Supplier-customer relations improved slightly, but at a slower pace compared to previous months due to disruptions in shipping routes in the Red Sea. 

The January PMI thus continues to highlight the difficult situation of domestic industry and confirms that domestic industry remains in recession. Developments abroad do not bring much optimism in this respect, as PMIs from Germany and the euro area also continue to remain well below the 50-point mark, although there was a slight increase in January (46.6 in the euro area, 45.4 in Germany). However, similarly to the Czech Republic, it has been in "contraction" territory since mid-2022 (Chart 1). The January PMI from China also remained below the 50-point threshold, and China's manufacturing sector has been slow to take off due to a weak domestic recovery and weak external demand.

In terms of the upcoming CNB meeting, today's data confirm weaker economic activity and a noticeable decline in inflationary pressures in the manufacturing sector, which may eventually serve as another supportive argument for board members considering a 50-point rate cut, as Vice Governor Jan Frait also suggested in an interview yesterday.
Development of industrial PMI in the Czech Republic and abroad

green: eurozone, yellow: Czech republic, blue: Germany, red: China (official)

Source: LSEG, S&P Global, CBA