Strong March economic data spoils weaker industrial payrolls and gives way to surprising growth structure
Economic commentary by Jaromir Šindel, Chief Economist of the CBA
March economic activity showed relatively strong data, suggesting stronger economic growth in the first quarter rather than the reported 0.5% quarter-on-quarter GDP growth. Core retail and construction were the main drivers. However, the recovery in construction and weaker industrial wage growth led to a change in the structure of the economic recovery trend for January to March. Construction was joined on the imaginary podium by industry, including energy-intensive industry, while retail trade showed weaker growth than services. Despite the weaker export momentum, the March foreign trade surplus returned to last year's average of CZK 19 billion. The foreign trade surplus again mainly stems from the automotive sector, accompanied by a smaller deficit in energy (falling prices).
The strong March data represent a positive signal for the economy. However, the change in the pattern of recovery in the first quarter, with weakening industrial wage growth, undermines expectations of a recovery this year underpinned by stronger consumption and its resilience to external shocks (i.e. tariff wars). However, the risk on the wage side is reduced by persistent price pressures in services, which suggest a continued divergence between services and industrial wage growth, and a possible unwinding of seasonal adjustment distortions.
Chart 1: Recent months have brought a stronger recovery in construction and industry than in services and retail trade
March economic activity data showed relatively strong data, suggesting stronger economic growth in the first quarter rather than the reported 0.5% quarter-on-quarter GDP growth. This is especially true for March's 1.6% month-on-month rebound in core retail sales. Despite weaker automotive activity and transitory weakness in the energy sector (-2.4%), solid growth in industrial activity (+0.4%) was also evident. This was driven by stronger manufacturing growth (+0.7%), where the negative correction from February's strong automotive output growth was more than offset by the remaining sectors. This includes energy-intensive sectors. These are likely to have benefited from stronger construction output since the last quarter of last year. There was a rebound in the buildings segment in March (+3.5% m-o-m) accompanied by continued strong growth in the infrastructure segment (+3.6%).
The latest recovery trend was surprising in its structure. The latest trends suggest still strong growth in construction and, surprisingly, also in industry (both with annualized growth of 7% in January-March), followed by slowing growth in services (+4.6%) and surprisingly more moderate annualized growth of around 2.5% in retail trade. Here, the weakening wage growth in industry may be reflected (see below and Charts 5 and 6). However, April sentiment does not suggest a negative change in consumers' purchasing plans. We should see a stronger contribution from the energy sector to industrial production growth in April, although weaker sentiment (excluding construction) poses downside risks (although the quarterly survey was not as negative). The deterioration in sentiment reflects US tariffs, which will negatively impact Czech export activity. There, the US destination share has strengthened by about 0.5% points to over three percent of total exports (see Chart 7; and I discuss the role of the US in Czech exports here).
Despite the weak export momentum in March (but also in February), the trade balance expanded slightly to a surplus of CZK 19 billion in March. This was boosted by energy, while a more modest surplus in autos was offset by a more modest deficit in the rest of foreign trade. However, over the last three months, the automotive part has again contributed more to the overall surplus with its annualized surplus of around 8% of GDP (see Chart 8), supported by a more moderate deficit with energy, which returned to -2% of GDP, while the rest of foreign trade in goods is running a deficit of almost 4%.
Slowdown in industrial wage growth. Despite relatively solid industrial activity, a continued decline in industrial employment is evident (-2.1%yoy). Moreover, although average monthly industrial wage growth accelerated slightly to 4.6% yoy in March, its average growth in the first quarter (4.3% yoy) remained below the 6.2% growth in the final quarter of last year. Moreover, my estimate of the monthly momentum slowed significantly to a 0.2% m-o-m seasonally adjusted rate from last year's average 0.5% increase. Barring a rebound in industrial wage growth, quarterly average growth will slow to 4.4% in the second quarter of this year. However, it is also possible that the current slowdown in the seasonally adjusted momenta is the result of a distortion after seasonal adjustment (due to the difference in the number of working days, as a similar negative adjustment effect was temporarily evident in March 2020 and 2021).
Chart 2: The structure of the recovery has surprised in recent months, while still suggesting stronger GDP growth
Table 1: Summary of economic data
Figure 2. Recent months have brought a stronger recovery in construction and industry than in services and retail trade
Chart 3. Industrial production also benefits from the recovery in energy-intensive production...
Chart 4. ... which goes hand in hand with the recovery in the construction sector
Chart 5: Industrial wages slowed in Q1, which may also reflect a statistical effect and be offset again by services
Chart 6. ... but we also observe slower, though still solid, growth in retail and services
Chart 7. Exports to the USA have also increased in recent months
Chart 8. In the first quarter, automobiles again achieved a more significant surplus (around 8% of GDP), the energy deficit narrowed to -2% of GDP and the rest of foreign trade in goods reached a deficit of almost 4%
Note: Unless otherwise stated, we use seasonally adjusted figures in the text. Annualized developments show possible year-on-year growth in the annual outlook if current month-on-month dynamics were to be maintained.