Stronger GDP growth in Q1 does not bring a disinflationary break
Economic commentary by Jaromir Šindel, Chief Economist of the CBA
GDP growth in the first quarter of this year had strengthened more strongly, by 0.8% q-o-q, than the preliminary estimate of the CZSO (0.5%) had suggested. The revision itself was not surprising given the published monthly data (see commentary here); perhaps its magnitude but the structure of growth undermined the positive impact of this revision. Quarter-on-quarter GDP growth was driven by a correction in foreign trade and a partial one in investment, while household consumption was rather flat in line with real average wages after strong consumption growth in the second half of last year.
Stronger economic growth remains associated with upward pressure on unit labour costs. Developments in the first quarter have translated into a stronger 2.2% y-o-y growth in GVA in the first quarter following a 1% increase in 2024. The economy's growth is now steadily relying on private services alone, with weakness remaining in productivity growth, which is being driven by the 'intermediate' finance sector, while other sectors are not breaking from their recent trend productivity trends. This translates into continued growth in unit labour costs of almost 5% in annualized terms, driven by market services (almost 7% in annualized terms), reflecting strong growth in services prices in the first quarter .
Household consumption, real wages, and a weak energy sector, together with the construction sector, are the main drag on the post-Covid recovery. Household consumption remains less than three per cent below its pre-Covidian level in early 2025, while overall GDP is less than three per cent above, mainly due to foreign trade and fixed investment. However, tariff wars are having a negative impact on the outlook for exports, which is also reflected in investment activity, particularly in machinery and equipment, but also in other segments of the economy, with the exception of a slight recovery in residential investment.
Although GDP accelerated only slightly from 0.7% growth in the final quarter of last year, the acceleration in value added (the sum of compensation of employees and operating profit) in GDP was stronger, at 1.3%. However, even here it is more of a correction of the weak 0.1% growth at the end of last year. And value-added growth has averaged 0.7% in the last two quarters, the same as GDP. Value-added gains in early 2025 mostly benefited from higher value-added in energy, financial services and construction, while manufacturing and trade went down.
The GDP growth revision adds upside risk to our weaker May forecast of 1.7% y/y GDP growth this year, which could move closer to 2% this year barring a major shake-up in the tariff wars. However, a more uneven growth pattern, weak investment and a slowdown in real wage growth, albeit probably temporary, pose downside risks. This is especially so if April's CPI growth disinflation below 2% y/y does not provide a positive boost to real wages.
Back to the detail of quarter-on-quarter GDP growth:
- Quarter-on-quarter GDP growth in the first quarter was mainly driven by an improved foreign trade balance. Here, it was partly a correction of the volatility of its balance from previous quarters, but perhaps also to some extent from the frontloading effect ahead of higher US tariffs.
- However, the contribution from possible frontloading did not translate into stronger manufacturing value added, which fell 0.7% in the first quarter. This was not the case for the economy as a whole, however, and overall value added finally jumped in early 2025, up a flat 1.3% quarter-on-quarter after a weak 0.1% growth at the end of last year.
- At the same time, fixed investment rebounded in Q1, but this was not enough to revive it after the stronger reported decline at the end of last year, and the structure also remains weaker.
- A 0.15% point positive contribution from inventories also contributed to GDP growth in Q1. Their cumulative contribution to GDP over the past three quarters has been 0.72% points. This is close to the long-run average of 1% points. Thus, a more significant negative correction is probably not imminent going forward, but stronger contributions should not drive GDP up either.
Dynamics in GDP growth and value added
Post-covariance economic recovery on the expenditure side does not change significantly: foreign trade, government, investment vs. weak household consumption
GDP growth still linked to weaker productivity but strong unit costs
Labour productivity varies across sectors, which is also reflected in the different evolution of unit labour costs
Average real wages stagnate with slower growth in Q1 and the post-covariance change in hours worked (public + market services vs. industry) remains unchanged
The energy and construction sectors are the main obstacles to a stronger economic recovery above the pre-forecast level
The low level of value added in the energy sector is more pronounced than a fall in energy produced would suggest, risking a positive revision to GDP and the composition of productivity and unit labour costs
Private consumption growth has slowed considerably, but after a very strong gain at the end of last year, but this also reflects a zero gain in real wages in the first quarter. Fixed investment has rebounded slightly thanks to infrastructure projects, but the economy needs a stronger boost.
