Transcript of an interview with Helena Horská
In the first part of the interviews after the Czech Banking Association's macroeconomic forecast, Petr Gapek and I discussed external influences and what has actually happened and what will happen. We take a look at the domestic economy in a little more detail with Helena Horská, Chief Economist at Raiffeisenbank. Good day.
Good day and thank you for the discussion.
Petr Gapko made a lot of reference to oil prices and how they will then translate in the domestic economy. I, before we get to that, will ask a different question. In terms of the domestic effects on the domestic economy, is the macro forecast you presented today positive or negative?
Whichever. We actually have a new forecast that foresees slower economic growth and higher inflation at the same time. So, on the face of it, for the ordinary consumer, but also for business, it's actually not entirely good news. But the good news is that none of the panelists are expecting a recession. So that's the good news. None of the panelists expect a drop in investment, none of the panelists expect a drop in domestic consumption. What we're a little bit worried about is the export performance because at a time when you have a Europe that is weakening, very weak anemic growth below 1 percent, and on top of that Asia is going to slow down just because of the Hormuz closure, there are no alternative markets that would help our exporters to, let's say, remove that weak Europe a little bit, to overcome that weak Europe a little bit. So it's actually a combination of good news and bad news. But it's important that we don't send out panic signals, because actually worse than Hormuz, worse than, say, an energy shock, and worse than possibly a commodity shock is panic, because even in history we have actually sent the economy into that recession ourselves through panic. So if we don't panic, if we adapt a little bit to the shocks that come from the left and the right, I think we are capable of growing. That growth will not be as high as we originally expected, 2.6 per cent. We are now expecting 2 per cent. Inflation will not be below 2 per cent as we originally expected, but rather above 2 per cent. And that is the basic message actually from the new macroeconomic forecast. The other maybe good news for households is that we are not expecting, we are expecting a slight increase in unemployment, but slight, we are not going to get above 5 percent. In other words, the labour market is normalising rather than cooling down completely. That is, forget about 3-plus percent unemployment. Unemployment will no longer start at three. That is, we don't have an overemployment problem here, but rather we are at a neutral level. What I would like to see in the labor market, movement. That is, people will start to leave sometimes out of compulsion the less promising fields, the less promising jobs, and will move to those companies that can handle the shocks, can handle the, shall we say, changing environment, and it will actually help wage growth. And that's the other actually good news, is that our forecast from the CBA macroeconomic panel is that wage growth will continue and those recent increases have led us to raise our wage growth estimate. So we have a slower economy, higher inflation, but nominal wage growth should accelerate. However, that increase will be moderated by the higher inflation that we expect to end up around 3% by the turn of the year, which is the upper end of the Czech National Bank's tolerance band. But again, good news.
All good news.
All good news. There will be no double-digit inflation here, so even that nominal wage growth should cover inflation. In other words, real wages should rise. And that's the good news.
I'll come back to the labour market normalisation. That's a long-term issue. So it means that those times when we used to boast in quotes that we had great low unemployment and economists were warningly sticking their finger up, "Watch out! That may be a nice number, but it's not actually positive news." So have we got to the point where economists are happy? And maybe I'll expand on that question, how united are the panelists that this is really the healthy normalization?
That's a terribly important question, because that number always has two sides of the coin, yeah. When we have low unemployment, that's great because most people, often people who wouldn't normally work, are actually working. So we have a lot of money in the economy, people have the resources to spend. On the other hand, it's a big problem for companies because they wanted to get an employee, so often even if they overpaid, there just wasn't one. For me, we're in a situation and now, of course, we can differ on whether we consider a flat or neutral unemployment rate of 4.5 percent. That's our estimate. It is also the Czech National Bank's estimate. So we are now slightly above that level, but only for a short period of time. So for me, we are close to the neutral level. And the consensus, let's say, among analysts is that this level is not hurting the economy, nor is it holding it back, nor is it, let's say, taking it off. That is, we are at that, let's say, theoretical neutral level, because we are neither holding back the economy with too low unemployment, nor are we actually creating any increased inflationary pressures. So for me we are really at that neutral level. Ranked at neutral, we can go downhill.
We've had all good news. That's always good news, but, after all, the macroeconomic forecast has its shadows, where are they?
And it's good to balance that out. I mean, I try not to create panic, not to create unnecessary fear, because the economy is very sensitive to the mood of society, to the confidence of key players in the economy. And if we say to ourselves, if we fight, we will grow, we will give it. However, none of us know, and this is the biggest risk of our whole forecast, how long Hormuz will be closed. None of us are able to forecast that. We know that we have some time until the end of June, the end of the second quarter. As the Hormuz and its closure is extended, that will be a risk to this forecast as well, even for that growth of around 2 percent. And it could happen, and this is the alternative, less favourable scenario that we also picked up among the panellists, which says that in that case the growth of the Czech economy would slow down below 2 per cent by a margin of about 1.6 per cent. So Hormuz is really critical. And on top of that, if the Hormuz closure were to last for a longer period of time, the energy shock that we're experiencing now, we're seeing fuel prices, we're already feeling upward pressure on energy prices, but so far it's this isolated price shock. But if Hormuz was closed for a longer period of time, we would be talking about problems with other very key commodities. It is not just aluminium that is imported, the automotive industry in Europe needs it. The helium is needed by the chip industry, by the fertiliser industry, by agriculture. And that would mean a raw material shock. That would have a bigger impact on the economy, a bigger impact on inflation. Then the economy would grow more slowly. One whole six, just under 2 percent and inflation would be rising over 3 percent. And that's, let's say, that's the risk, that's the downside, that's the shadow that's still being cast by Hormuz on our macroeconomic forecast. The other risk to inflation is perhaps too loose a budget policy, because that could paradoxically lead to more money in the economy, more spending and higher inflation. More inflation than growth, because that consumption is fuelling inflation rather than growth. So that is also a risk. It is also a risk, of course, how other central banks will react, because if, for example, the European Central Bank were to raise interest rates quickly, the Czech koruna could depreciate, which would help Czech exporters to compensate a little bit for the shortfall in exports, but it would make imports more expensive. The other issue is, of course, the rise in wage costs, because from one point of view, the news that real wages will rise is good for households, but from the point of view of companies, it means that their wage costs will still rise. And we are already seeing that the inflation in services is really reflecting the rise in wage costs, the historic rise in energy prices, the rise in rents. And if, in fact, real wages and costs were rising faster, that would be a problem for businesses, and that's where we might see that unemployment rate start to rise above that 5 percent and it would no longer be neutral and it would be one that would be higher, so it would actually be kind of holding back household consumption.
One last thing. If things don't go well, that is, all of that, those risks will materialize. From the macro forecast that we presented today, do you see any positive bright spot there that we can rely on even in that case?
It is about the stability of the domestic economy, because the shocks are coming from outside. The economy has found that source of growth within itself. This is what we have always envied Poland, that Poland has actually maintained its growth in times of various economic shocks, well, because it has been able to rely on domestic demand. So Germany sneezed, we had the flu. And we can actually see here that we are partially disconnecting from Germany. It's never going to go completely, but we are partially disconnecting. The German economy is supposed to stagnate again this year, but we will grow. Here it is just proof that the economy here has changed the model and we are actually doing well, but it is based on household consumption. We can see that we have reserves, because the savings rate of Czech households is still very high, above average. So if households have a problem, they can use the reserves. I am just worried about panic, because panic usually causes households to continue saving but to cut back on current spending, and that could strangle the economy. So even in the worst-case scenario, we have a domestic economy, household consumption and business investment that stayed high at the beginning of this year and last year and started to grow at the end of the year. So if businesses and households don't panic, that economy will be underpinned by the domestic economy, and that's good news for me.
Good news finally from Helena Horska, chief economist at Raiffeisenbank. Thank you very much.
I thank you for the invitation and for the nice questions.
Thank you as well. If you are interested in more details or in the full macro forecast of the Czech Banking Association, you can find it on our website and on our networks. So have fun.