July sentiment brings slightly worse signal for the economy and the CNB
Economic commentary by Jaromir Šindel, Chief Economist of the CBA
The slight deterioration in confidence in July did not significantly change the positive signals brought to the economy by stronger economic activity in the first half of the year with better prospects for GDP growth of over 2% year-on-year this year. This also reflects stronger July plans for large household purchases, but weak industrial demand will continue to pose a limit to stronger growth. Beyond that, the lack of workers and high capacity utilization do not signal significant disinflationary pressures that would relieve the central bank. However, signals from the services sector are more promising with the prospect of a slight easing of inflationary pressures.
July sentiment deteriorated slightly due to services and industry, but in both sectors this does not bring significantly negative news for the short-term economic outlook. Sentiment in industry is still above the average of the previous three months and services remain above the long-term average. Above that, consumer sentiment is strengthening, which is reflected in the recovery in business confidence. Moreover, sentiment in the construction sector remains well above its long-term average.
The vulnerability for the economy is posed by a medium-term deterioration in weak industrial demand, albeit with insufficient production capacity. The construction sector has also seen a deterioration in demand perceptions, but this remains below the long-term average, while the persistent shortage of workers is a more significant problem. This combination does not send a good signal for the necessary productivity catch-up relative to wage growth in the economy.
Price expectations have risen slightly due to services and consumer spending. There was a more significant increase in services, but after a dip in June. This signals a return to higher month-on-month core inflation in services after their stronger disinflation in June. However, the positive news is that the return of inflation expectations in services remains on a slightly downward trend.
Labour market expectations look stable, but with better prospects in industry. This is a positive signal for the labour market, especially given the recent rise in the registered jobless rate to a seasonally adjusted 4.4% in June from 3.8% a year ago.
Chart of the Report
According to the July CSO Economic Sentiment Survey, confidence in the Czech economy is holding around its long-term average after a month-on-month deterioration. Its level is therefore below that of the previous month, but remains above that of the previous three months. Compared to last year's value, it is at an improved level.
The individual sectors stand as follows in relation to the long-term average:
* industry, trade below long-term averages,
* households, services, construction above the long-term average.
Sectoral dynamics show July sentiment
* households above last month's level (and above the previous three months) and above last year's level;
* industry worse than last month (but above the previous three-month average) but better than last year;
* in services below last month (and below the previous three months) but better than a year ago;
* in trade better than last month (but below the previous three-month average) but better than last year;
* in construction below last month's level (but above the previous three months) but above last year's level.
Only a slight deterioration in sentiment
... does not change the upside risks to the second quarter outlook
Sentiment in Czech industry weakened in July, but does not change trend
... and still operates at high capacity utilization
Staff shortages remain a limit in the construction industry
... while the lack of demand in the industry
Labour market expectations have stabilised
... also due to better expectations in the industry
Price expectations in services have returned to higher levels after the June drop and remain on a downward trend
... , which is not the case for headline inflation expectations
