Recent Macroeconomic and Monetary Developments in the Czech Republic and Outlook Miroslav Singer Governor, Czech National Bank FORECASTING DINNER 212, Czech CFA Society Prague, 22 February 212 M. Recent Developments in the Czech Republic and 1 M. M. Singer: - Czech Financial The Present Macroeconomic Czech Present Consumer Czech Republic: Conditions, economy Crisis: Republic: Conditions, economy and protection Staying Impacts Likely Future financial and Monetary developments, Can Impacts development and challenges Ahead record Monetary crisis the in Policy of CR financial from the low monetary and and and the Eurozone: Curve CR the Policy rates opportunities Lessons Europe: Outlook with CR and point services: and policy be Lessons and of CNB for Regard sustained? GDP view Czech the Outlook and view CNB to growth for Supervisors of financial and the Republic Monetary approach Supervisors Czech comparisons Challenges for Policy sector CR banks 1 1 1
Overview Recent macroeconomic and monetary developments CNB forecast (February 212) M. Singer Recent Developments in the Czech Republic and Outlook 2
GDP (annual and quarterly percentage changes at constant prices; seasonally adjusted data) 8 6 4 2-2 -4-6 I/7 I/8 I/9 I/1 I/11 q-o-q GDP grow th 211 Q4: preliminary y-o-y GDP grow th Source: CZSO GDP fell by.3% q-o-q in 211 Q4 (for the second time in a row) and the Czech economy went into a shallow recession; y-o-y growth slowed from 1.2% in 211 Q3 to.5% in 211 Q4 M. Singer Recent Developments in the Czech Republic and Outlook 3
Output gap (in per cent of potential output) 8 6 4 2-2 -4-6 I/4 I/5 I/6 I/7 I/8 I/9 I/1 I/11 Range of 3 estimates of production function Average of 3 estimates of production function Kalman filter HP filter Source: CNB The output gap continued to open into negative values in 211 Q3 M. Singer Recent Developments in the Czech Republic and Outlook 4
Structure of annual GDP growth (contributions in percentage points; seasonally adjusted data) 1 8 6 4 2-2 -4-6 -8 I/7 I/8 I/9 I/1 I/11 Household consumption Gross fixed capital formation Change in inventories Net exports Government consumption NPISH expenditure Source: CZSO Net exports were the sole contributor to real GDP growth in 211 Q3 M. Singer Recent Developments in the Czech Republic and Outlook 5
Industrial production (y-o-y in %) 2 15 1 5-5 -1-15 -2-25 Industrial production Seasonally adjusted HP trend 1/7 7 1/8 7 1/9 7 1/1 7 1/11 7 Source: CZSO The seasonally adjusted rate of growth of industrial production slowed from 4.9% in November to 4.5% in December M. Singer Recent Developments in the Czech Republic and Outlook 6
Barriers to growth in industry 1 8 6 4 2 1/7 1/8 1/9 1/1 1/11 Insufficient demand Material and/or equip. short. Other Labour shortages Financial constraints None Source: CZSO Insufficient demand is still the main barrier to growth in output in industry; its weight started rising recently M. Singer Recent Developments in the Czech Republic and Outlook 7
Retail sales (percentages; constant prices) 2 15 Retail sales incl. cars Seasonally adjusted HP trend 1 5-5 -1 1/7 7 1/8 7 1/9 7 1/1 7 1/11 7 Source: CZSO The y-o-y rate of growth of retail sales has been oscillating above zero in recent months due to a prevailing low number of vacancies, persistently high unemployment and modest wage growth M. Singer Recent Developments in the Czech Republic and Outlook 8
State budget current performance (in CZK bn GFS 1986 methodology) 5 21, 13,1 1,6-5 -91,5-1 -15-2 21 211 212-96,7-125,9-142,5-14,8-156,4 1 2 3 4 5 6 7 8 9 1 11 12 Source: Ministry of Finance The state budget recorded a lower deficit in 211 than in 21; in January 212 the surplus was higher than in 21 and 211 M. Singer Recent Developments in the Czech Republic and Outlook 9
Output gap and impact of fiscal discretion on GDP (% of real GDP) 6 4 2-2 -4-6 21 23 25 27 29 211 Av. discretion P V1 and TD Av. discretion P V2 and TD Output gap PF Output gap KF Source: CNB Note: Impacts of bottom-up discretion: P are impacts of revenue measures using IMF fiscal multipliers (Klyuev and Snudden, 211); V1 and V2 are impacts of expenditure discretion using CNB multiplier of.6; V1 is deviation from trend of adjusted total expenditure; V2 is deviation from trend of ratio of adjusted total expenditure to GDP; TD is average impact of discretions identified by top-down method using multiplier of.6. Positive value indicates fiscal restriction, negative value fiscal expansion. Output gap: PF using production function, KF using Kalman filter. Fiscal policy was procyclical in 22, 24-26, 28 and 21-211 M. Singer Recent Developments in the Czech Republic and Outlook 1
Trade balance annual accumulation (in CZK bn; ; national concept) 12 11 1 27 28 29 21 211 9 8 bn CZK 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 9 1 11 12 Note: National concept is based on change in ownership principle Source: CZSO The cumulative trade surplus in 211 was higher than in previous years M. Singer Recent Developments in the Czech Republic and Outlook 11
CZK/EUR (3 Jan 2 14 Feb 212) 38 Source: Eurostat 36 34 32 3 28 26 24 22 2M1D3 2M4D24 2M8D14 2M12D4 21M3D26 21M7D16 21M11D5 22M2D25 22M6D17 22M1D7 23M1D27 23M5D19 23M9D8 23M12D29 24M4D19 24M8D9 24M11D29 25M3D21 25M7D11 25M1D31 26M2D2 26M6D13 26M1D3 27M1D24 27M5D21 27M9D1 27M12D31 28M4D22 28M8D13 28M12D3 29M3D26 29M7D17 29M11D6 21M3D1 21M6D23 21M1D13 211M2D2 211M5D27 211M9D16 212M1D6 Despite positive foreign trade, current account and government budget developments, and irrespective of the high degree of financial stability, the koruna has recently been deviating to the depreciation side of its long-run trend M. Singer Recent Developments in the Czech Republic and Outlook 12
8 7 6 5 4 3 2 1-1 Inflation (annual percentage changes) 1/7 1/8 1/9 1/1 1/11 1/12 Monetary-policy relevant inflation Consumer price inflation Source: CZSO Annual CPI inflation jumped from 2.4% in December to 3.5% in January; 1.1 p.p. of the total inflation is due to the first-round effects of the tax change on administered and non-administered prices M. Singer Recent Developments in the Czech Republic and Outlook 13
Industrial producer prices (annual percentage changes; contributions in p.p.) 8 6 4 2-2 -4 1/1 3 5 7 9 11 1/11 3 5 7 9 11 Manufacture of coke and refined petroleum products Manufacture of basic metals and fabricated metal products Mining and quarrying and pow er generation Manufacture of food, beverages and tobacco Other branches of manufacturing Total PPI (annual percentage changes) Source: CZSO Industrial producer price inflation fell from 5.6% in October to 5.5% in November and 4.6% in December M. Singer Recent Developments in the Czech Republic and Outlook 14
6 5 4 3 2 1-1 -2-3 -4-5 Agriculture producer prices (annual percentage changes) 1/7 1/8 1/9 1/1 1/11 Agricultural producer prices Livestock product prices Crop product prices Source: CZSO Agricultural producer price inflation fell further in December M. Singer Recent Developments in the Czech Republic and Outlook 15
Key CNB rates (in %) 5 4 3 2 1 1/7 1/8 1/9 1/1 1/11 1/12 Lombard rate 2W repo rate Discount rate Source: CNB The CNB has left its key rates unchanged since May 21 M. Singer Recent Developments in the Czech Republic and Outlook 16
Loans to corporations and households (annual percentage changes) 4 3 2 1-1 1/7 1/8 1/9 1/1 1/11 Loans, total Loans to non-financial corporations Loans to households Source: CNB Growth in loans to the private sector remains subdued M. Singer Recent Developments in the Czech Republic and Outlook 17
Client and market interest rate spreads (percentage points) 5 4 3 2 1 1/7 1/8 1/9 1/1 1/11 Corporations (small loans up to CZK 3m) 1Y 3M PRIBOR House purchase 1Y government bonds Source: CNB House purchase 1Y 3M PRIBOR Corporations (large loans over CZK 3m) 1Y 3M PRIBOR Banks reduced slightly further the spreads between client and market rates on house purchase loans and on large corporate loans M. Singer Recent Developments in the Czech Republic and Outlook 18
Czech economy: main features 1/2 High openness sensitivity to external developments Persisting fundamental macroeconomic balances and emergence of only minor imbalances: 211 H2: shallow recession Output gap opening up Exchange rate of koruna: Temporary interruption of (sustainable) appreciation trend Exchange rate acted as buffer against shocks Inflation: Very weak demand pressures Cost shocks subsiding Transient rise in inflation due to VAT hike in 212 M. Singer Recent Developments in the Czech Republic and Outlook 19
Czech economy: main features 2/2 Domestic fiscal policy: Fiscal consolidation + low level of government debt mitigating risk of contagion from euro area Was procyclical in 21-211 Will have stagflation effects on economy in 212 (lower domestic demand + higher inflation due to higher VAT) Banking sector is in good shape: high capital adequacy ratio, profitability, resilience to shocks (in CNB stress tests) The main drivers of the Czech economy are external developments and domestic fiscal policy M. Singer Recent Developments in the Czech Republic and Outlook 2
GDP in CZ, Germany and EU-27 (quarterly percentage changes at constant prices; seasonally and working day adjusted data; 1998 Q1 211 Q3) 1 8 6 y-o-y change in % 4 2-2 -4-6 -8 1998Q1 1998Q3 1999Q1 EU-27 Czech Republic Germany 1999Q3 2Q1 2Q3 21Q1 21Q3 22Q1 22Q3 23Q1 23Q3 24Q1 24Q3 25Q1 25Q3 26Q1 26Q3 27Q1 27Q3 28Q1 28Q3 29Q1 29Q3 21Q1 21Q3 211Q1 211Q3 Source: Eurostat During the crisis the business cycle in the Czech Republic converged to that in Germany and the EU-27 M. Singer Recent Developments in the Czech Republic and Outlook 21
GDP in 211 Q3 (index; GDP in 28 Q3 = 1; seasonally and working day adjusted data) 115 11 11,1 15 14,6 28 Q3 = 1 1 95 9 85 8 Poland Sweden 12,4 12,111,411,3 11,2 1,4 99,5 99,4 99,3 98,9 98,8 97,7 97,3 97,1 97, 97, 96,3 96,3 96, 95,7 Note: Greece: 211 Q1 Austria Slovakia Germany Malta Belgium France UK EU-27 Netherlands Cyprus CR Lux Finland Spain Portugal Italy Hungary 93,5 93,1 92,4 92,1 9,1 89,3 Denmark Bulgaria Romania Estonia Lithuania Ireland Slovenia Greece Latvia Source: Eurostat, own computation In 211 Q3, Czech GDP almost reached the pre-crisis level and is comparable with the EU-27 average M. Singer Recent Developments in the Czech Republic and Outlook 22
CNB Forecast CNB Forecast (February 212) M. Singer Recent Developments in the Czech Republic and Outlook 23
GDP forecast (annual percentage changes; seasonally adjusted) 1 8 6 4 2-2 -4 I/1 II III IV I/11 II III IV I/12 II III IV I/13 II III 9% 7% 5% 3% confidence interval Source: CNB GDP will stagnate overall this year M. Singer Recent Developments in the Czech Republic and Outlook 24
Headline inflation forecast (annual percentage changes) 7 6 5 4 3 2 1-1 Monetary policy horizon Inflation target I/1 II III IV I/11 II III IV I/12 II III IV I/13 II III 9% 7% 5% 3% confidence interval Source: CNB Headline inflation will rise temporarily to just above 3% in 212 owing to the VAT increase M. Singer Recent Developments in the Czech Republic and Outlook 25
Monetary-policy relevant inflation forecast (annual percentage changes) 7 6 5 4 3 2 1-1 Monetary policy horizon Inflation target I/1 II III IV I/11 II III IV I/12 II III IV I/13 II III 9% 7% 5% 3% confidence interval Source: CNB Monetary-policy relevant inflation will be close to the target over the entire forecast horizon M. Singer Recent Developments in the Czech Republic and Outlook 26
Interest rate forecast (3M PRIBOR in %) 4 3 2 1 I/1 II III IV I/11 II III IV I/12 II III IV I/13 II III 9% 7% 5% 3% confidence interval Source: CNB Consistent with the forecast is stability of market interest rates in the near future and a modest decline thereafter M. Singer Recent Developments in the Czech Republic and Outlook 27
Exchange rate forecast (CZK/EUR) 28 26 24 22 2 I/1 II III IV I/11 II III IV I/12 II III IV I/13 II III 9% 7% 5% 3% confidence interval Source: CNB The nominal exchange rate will gradually appreciate from its currently weakened level M. Singer Recent Developments in the Czech Republic and Outlook 28
External risks: Risks ahead Escalation of debt crisis in euro area and risks of contagion Abrupt negative shift in foreign demand (especially for Czech automotive output and export-intensive industries) Gradual transfer of regulatory and supervisory powers to European level Domestic risks: Sudden depreciation of koruna Worsening of budget balance Foreign risks clearly dominate M. Singer Recent Developments in the Czech Republic and Outlook 29
Thank you Miroslav Singer Miroslav.Singer@cnb.cz Tel: +421 224 412 Česká národní banka Na Příkopě 28 115 3 Praha 1 M. Singer Recent Developments in the Czech Republic and Outlook 3