Weak July industrial and services recovery hinders continuation of solid GDP growth
Economic commentary by Jaromír Šindel, Chief Economist of the CBA: Although the economy breathed a half-percent growth in the second quarter, the July figures were rather disappointing and suggest a cooling. However, the Czech economy is generating upside risks to inflation, which limits the room for manoeuvre of the CNB, which is likely to stick to the CNB's 3.5% terminal interest rate thesis. August's registered unemployment confirmed a worse trend, which, however, is not confirmed by other data.
According to the July data, the automotive sector is stagnating, energy-intensive manufacturing is falling again and foreign trade has weakened noticeably month-on-month. Wage growth in industry also eased, which, together with higher unemployment, fits in with weak growth dynamics in services and retail trade. In contrast, the construction sector remains a driver, despite a partial slowdown, thanks to infrastructure projects.
The positive revision to 0.5% q-o-q GDP growth in Q2 surprised the consensus and made the CNB's more optimistic forecast more realistic (2.6% y-o-y in 2025 vs. the CBA's 2.1% forecast). However, the monthly data need a stronger boost in August and September for this picture to hold up in Q3 (see Chart 1). August sentiment suggests improvement in services and construction, and in trade, but here the signal is weaker due to slightly weaker household plans for major purchases (core retail sales fell 0.4% m-o-m in July). Sentiment in industry, however, is still overshooting due to weaker export expectations in Germany.
Inflationary pressures from the labour market strengthened in Q2. The GDP numbers came back with robust growth in unit labor costs, including the service sector. While the August service sector confidence survey gives hope of softer inflationary pressures, the third quarter wage and productivity data will have to confirm this. Until then, the CNB will see the economic numbers as more of an inflationary signal.
July data rather disappointing
Industrial production rose by 0.8% m-o-m in July, but this did not compensate for the more pronounced declines of the previous two months (cumulatively by 2.5%). Moreover, trade and services showed weakening momentum, due to continued low sales in services (-0.1% in July) and weaker demand in retail trade (+0.3%), respectively, and a decline in sales excluding autos (-0.3%). Only the construction sector continued to grow in July, albeit at a more moderate pace (+1%), thanks to infrastructure projects, while building construction has stagnated in the last two months.
Foreign trade declined month-on-month in July, both for exports (-4.2%) and imports (-3.8%). The foreign trade surplus has widened to an annualized ratio of 2.6% of GDP in the last three months, and the positive news is that this occurred despite a more modest surplus in the automotive sector (7.3% of GDP). The overall balance remained strong at a seasonally adjusted CZK 19 billion in July, slightly below June's result (CZK 21 billion), well above the January-May level (CZK 13.5 billion) and roughly in line with last year's average.
The economy confirmed the upside risks to inflation with stronger quarter-on-quarter GDP growth of half a percent in the second quarter.
This is mainly due to stagnant productivity, with GDP growth linked to rising unit labour costs. This reflects the continued decline in investment in machinery and equipment. In addition, unit costs are seen rising across sectors and are also picking up again in business services, mainly due to stagnating productivity in professional activities and a still incomplete productivity recovery in trade. Wage growth picked up quarter-on-quarter in Q2, and the share of sectors with non-inflationary wage dynamics fell again significantly (see the last two charts).
August's registered unemployment confirmed the worse trend, which is not confirmed by other data.
The registered unemployment rate continued its creeping deterioration in August, in line with August expectations. On a seasonally adjusted basis, the unemployment rate thus came in above 4.5%, 0.6% points higher than a year ago and 1.2% points above the previous low of 3.3% in the spring of 2022, before the Russian invasion of Ukraine. Still, other labor market indicators, notably rising employment from the national accounts (for the second quarter), as well as solid August job creation numbers, remain solid.
July's growth momentum suggests weaker economic growth ...
... than consumption-driven GDP growth in the second quarter
The post-covariance recovery in recent months after the July export cooling is only visible in the construction sector
Growth momentum in services and retail trade slowed down significantly
August registered unemployment confirmed a worse trend... 
...which, however, is not supported by the other data.
The economy, with stronger quarter-on-quarter GDP growth of half a percent in the second quarter, confirmed the upside risks to inflation ...
... also due to weaker investment in machinery and equipment
Unit costs are also rising again in business services, ... 
... mainly due to stagnating productivity
Wage growth strengthened quarter-on-quarter in the second quarter and ... 
.... the share of sectors with non-inflationary wage dynamics has fallen significantly again 
Wage growth exceeded CNB expectations ... 
... which also applies to unit labour costs
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Note: Unless otherwise stated, we work with seasonally adjusted numbers in the text. Annualized developments show possible year-on-year growth in the annual outlook if the current month-on-month dynamics are maintained.