Francouzsko-česká obchodní komora Chambre de commerce franco-tchèque Quo Vadis 19: Czech economic perspectives and CNB policy Vojtěch Benda CNB Board Member Prague, Feb 19
The Czech economy: A stable island in a storm?
Outline and main messages GDP: robust growth, has shown resilience to foreign slowdown Labour market: extremely tight, constraining businesses but supporting demand Inflation: strong domestic pressures, antiinflationary risks from foreign prices Monetary policy: outlook of broad stability Potential need for higher rates if koruna fails to strengthen 3
Economic growth looks set to continue 7 6 5 4 3 1 GDP growth forecast (annual percentage changes; seasonally adjusted) I/17 II III IV I/18 II III IV I/19 II III IV I/ II III 9% 7% 5% 3% confidence interval Economic growth will continue to be supported by robust consumption by Czech households on the back of strong household income and strong domestic investment activity prompted by need to raise labour productivity Growth of Czech economy will accelerate slightly in 19 (.9% on average) after temporary slowdown towards end of 18. Potential output growth is catching up and will lead to currently positive output gap closing.
GDP components forecast Annual percentage changes 18 19 GDP.8.9 3. Household consumption 3.5 3.6 3. Government consumption 3.5.1. Gross capital formation 4.6 5.9 4.3 Gross fixed capital formation 9.4 4.8 3.7 Exports of goods and services Imports of goods and services 4.3 3.9 5.7 5.8 5.5 6. 5
Structure of growth Contributions to growth demand side Investment decomposition 8 6 15 4 1 5-5 - -1-4 I/14 I/15 I/16 I/17 I/18 I/19 I/ -15 I/14 I/15 I/16 I/17 I/18 I/19 I/ Household consumption Net exports Private investment Public investment Gross fix. capital formation Government consumption Change in inventories Gross capital formation Change in inventories Gross domestic product (annual percentage changes; contributions in percentage points; constant prices; seasonally adjusted) Domestic demand to remain major driver of growth Strong investment reflecting need to boost productivity Investment has recently made even bigger growth contribution than private consumption Rapid growth of private investment has been joined by public investment activity this year EU fund drawdown acceleration has contributed. Even public investment might increase productivity if targeted at infrastructure development.
Private and public consumption Both private and public consumption to stay solid Disposable income keeps growing, supporting demand 6 1 1 4 8 6 4 - -4 - I/14 I/15 I/16 I/17 I/18 I/19 I/ Household consumption Government consumption -6 I/14 I/15 I/16 I/17 I/18 I/19 I/ Wages and salaries Entrepreneurs' income Property income Social benefits Taxes and social contrib. Other current transfers Gross disposable income (annual percentage changes; contributions in percentage points; constant prices; seasonally unadjusted) Individual consumption Surge in government consumption driven largely by public workers pay Feeding into households disposable income Private consumption driven by solid income growth Nominal disposable income growing at rates exceeding 6%, expected to stay strong
Consumer confidence shaken a bit 1 1 Consumer confidence survey (balance of positive and negative answers) 3. Unemployment rate and employment growth (%) 7 8.5 6 6 4. 5 1.5 4-1. 3-4 1/16 5 9 1/17 5 9 1/18 5 9 1/19.5 Economic situation Intention to save Expected unemployment Financial situation. I/14 I/15 I/16 I/17 I/18 I/19 I/ 1 Consumer confidence indicator Employment General unemployment rate (right-hand scale) Perceived economic situation has deteriorated, dragging down consumer confidence Joined by unemployment expectations While financial situation remains solid Data still show unemployment close to record lows with no sign of trend reversal in near future Additionally employment keeps growing
Budget balance remains positive Both general government and structural balance positive recently According to ESCB methodology, structural balance remains at around 1% of GDP Strong income growth, driven mainly by VAT and social contributions On expenditure side, public investment growing fast (on both central and municipal level), with help of EU funding Balance to stay positive in years to come, general govt. debt to decline 9
Fiscal impulse supportive to growth in 19 Fiscal policy will remain expansionary in 19 Increase in public sector wages and retirement pensions supporting private consumption Investment co-funded by EU continues to support growth Fiscal impulse turns neutral in No new expansionary measures announced, recent announcements on the contrary point to risk of tighter fiscal policy 17 18 19 exp. actual outcome forecast forecast FISCAL IMPULSE..8.4. of which impact through: private consumption..4.3. private investment -.1... government investment, domestic.... government investment, EU funded...1. 1
Output gap and price pressures Output gap to close from above 3 1-1 - -3-4 -5 I/9 I/1 I/11 I/1 I/13 I/14 I/15 I/16 I/17 I/18 I/19 I/ Small structural model Production function 3 1-1 - -3 Price pressures from domestic economy remain high I/14 I/15 I/16 I/17 I/18 I/19 I/ Intermediate goods prices Price convergence Import prices Total domestic price pressures (percentage deviations from potential output) (contributions in p.p. to q/q increase in domestic price pressures) Domestic economy creating robust price pressures. Output gap estimates suggest that currently positive gap would close from above in near future Driven both by mild slowdown in growth and by potential growth catching up as businesses invest to boost productivity Price pressures from domestic economy currently driven by increasing wage costs Price of capital contributing positively, too. Rising rates and capacity constraints making investment costly.
Main constraint? Lack of workforce. 1 Barriers to growth: regular survey among industrial companies 8 6 4 1/5 1/7 1/9 1/11 1/13 1/15 1/17 1/19 Insufficient demand Material shortages Other Labour shortages Financial constraints None Labour shortages are increasing concern since 15 Material shortages have also started to disturb industrial producers recently 1
Labour market: main constraint LUCI labour utilisation composite index reaching new highs Beveridge curve exploring uncharted territory 3,,5, 1,5 1,,5, -,5-1, -1,5 I/ I/4 I/6 I/8 I/1 I/1 I/14 I/16 I/18 Vacancies Number of employed LUCI Number of unemployed Others Note: Index; vertical axis shows standard deviations. Czech labour market heated far beyond 8 levels Number of unemployed pushing record lows. Exceeded by vacancies in mid-18 and diverging further. Tapping workers outside current labour force (women, elderly) and importing workforce remain the ways to go 13
New workers or more hours per head? FTE growth recently driven by headcounts Employing previously discouraged workers leading to increasing number of part-timers. Most significant in age group 6+, but also young workers 14
Wage pressures easing only gradually Tight labour market would again drive wage growth in 19 Slowdown in 19 mainly due to public sector wages, which continue to grow, but at slower pace than in 18 Teachers wages rose by 15%, other public servants on average by 6%, according to plan Average nominal wages (annual percentage changes; total wages source: CZSO; wages in market and non-market sectors source: CNB calculation) 14 1 1 8 6 4 Total wage growth easing below 7% this year Low unemployment continues to support wage demands of workers and unions I/14 I/15 I/16 I/17 I/18 I/19 I/ Nominal wages, total Nominal wages in market sectors Nominal wages in non-market sectors In, wage dynamics would adjust towards longterm equilibrium of around 5% 15
Lack of foreign price pressures Following oil price fall and demand weakness, contribution of foreign prices to domestic inflation has diminshed. Despite koruna weakness With renewed koruna appreciation, imports would become cheaper and contribute negatively to domestic inflation Import prices would start exerting price pressures again in Foreign price growth slowing (y/y increase in euro area price levels) Costs in consumer sector (contributions in p.p. to q/q increase in overall price pressures) 6 3 4 1-1 - - -4 I/14 I/15 I/16 I/17 I/18 I/19 I/ -3 I/14 I/15 I/16 I/17 I/18 I/19 I/ Euro area CPI Euro area PPI Intermediate goods prices Import prices Price convergence Total domestic price pressures 16
Inflation developments Core inflation has remained main driver of price growth With substantial contribution from imputed rent Still, nontradables price growth illustrates domestic price pressures Food price growth has disappeared despite weak harvest 17
Inflation to stay close to the target Inflation to stay above target during 1H19 then converge to % from above. CZK appreciation would tame import price growth and limit growth of tradable goods prices. This would compensate strong domestic inflation pressures, resulting in inflation staying close to target. 5 4 Headline inflation forecast (year on year in %) Monetary policy horizon 3 Inflation target 1 I/17 II III IV I/18 II III IV I/19 II III IV I/ II III 9% 7% 5% 3% confidence interval 18
Structure of inflation core is driver Core inflation would remain main contributor Food price would accelerate as higher food commodity prices feed through to consumers Administered prices have jumped at start of 19 due to energy (mainly electricity) repricing Fuel prices to ease off as a result of oil price correction 3 Structure of inflation forecast (year on year in %) 1-1 I/14 I/15 I/16 I/17 I/18 I/19 I/ Core inflation Administered prices Indirect taxes Food prices Fuel prices Headline inflation 19
Monetary policy normalisation in progress Seven hikes since FX floor was ended in April 17. Ahead of regional peers and major trading partners in hiking cycle But EUR-CZK rate differential not sufficient to ease pressures on koruna in 18 Emerging market currencies suffered from USD rate hikes 5 4 3 1 Interest rate path towards neutral rates (%) 1.8 1.9 1.1 1.11 1.1 1.13 1.14 1.15 1.16 1.17 1.18 1.19 W repo rate Discount rate Lombard rate Differentials of CZK interest rates against EUR and USD (%).5. 1.5 1..5. -.5-1. -1.5 -. 1/14 1/15 1/16 1/17 1/18 1/19 EUR 3M EUR 1M USD 3M USD 1M
Koruna after FX floor Last months of FX commitment saw large volumes of newly accumulated reserves due to interventions Koruna gained in 17 but appreciation halted in 18. Emerging markets sell-off partially to blame. 9 8 15 7 FX floor regime 1 6 5 5 1/13 4 7 1 1/14 4 7 1 1/15 4 7 1 1/16 4 7 1 1/17 4 7 1 1/18 4 7 1 FX interventions volume (right scale, bn. EUR) CZK/EUR (left scale) 1
Exchange rate forecast The forecast sees koruna getting below 5 CZK/EUR during 19 Koruna will be supported by positive interest rate differential. Current account surpluses contributing to demand for CZK. Trend real appreciation is additional factor. 8 7 6 5 4 3 1 Exchange rate forecast (CZK/EUR, quarterly averages) I/17 II III IV I/18 II III IV I/19 II III IV I/ II III 9% 7% 5% 3% confidence interval Weaker koruna scenario Risk of more gradual appreciation due to excessive CZK liquidity: Nominal CPI inflation 3M PRIBOR GDP growth exchange rate (in pp) (in pp) (in pp) (CZK/EUR) I/19..3.. II/19.1.4.1.4 III/19.1.4.1.3 IV/19..4.1. I/..3..1 II/.1.1 -.1.1 III/.1. -..1 IV/.. -.1.1 (differences from baseline)
Interest rate path Forecast implies broad stability of market interest rates at forecast horizon. Rates are kept stable by outlook of postponed ECB hikes and expected koruna appreciation 3M PRIBOR expected to stay close to % 5 4 3 1 Interest rate forecast (3M PRIBOR in %) I/17 II III IV I/18 II III IV I/19 II III IV I/ II III 9% 7% 5% 3% confidence interval Weaker koruna scenario Temporary lack of koruna strengthening would imply higher rates Beyond horizon of projection, rates would return towards neutral levels 3
.5.4.3..1. -.1 -. -.3 -.4 Monetary conditions Monetary conditions have turned slightly restrictive as a result of interest rate hikes Exchange rate component was recently expansionary with koruna staying weak. This is about to correct. Real monetary conditions index (positive values refer to easy monetary conditions and negative values to tight monetary conditions; CNB calculation) -.5 I/4 I/5 I/6 I/7 I/8 I/9 I/1 I/11 I/1 I/13 I/14 I/15 I/16 I/17 I/18 I/19 I/ Exchange rate component Interest rate component RMCI 4
Current monetary policy setting Outcome of CNB Bank Board monetary policy meeting on 7 Feb 19: Bank Board assessed risks to forecast as being slightly inflationary. Potential slower appreciation of koruna seen as risk for higher inflation and rates Disorderly Brexit would slow domestic growth and further weaken koruna Protectionist measures in international trade remain source of external uncertainty W repo rate remained at 1.75%, discount rate at.75% and Lombard rate at.75%. 5
Rate setting: what has changed? Weaker koruna, including short-term forecast, suggesting higher rates Foreign environment (prices: EA PPI, rates: 3M EURIBOR) dragging domestic rate outlook down 6
Sensitivity scenario hard Brexit Impact on external environment: Direct impact on exports from CZ to UK (small) Indirect impact through fall in euro area demand (large) Includes significant EUR depreciation effect (against USD) Impact of hard Brexit on GDP growth in UK and EA (percentage points deviation from baseline). -.5-1. -1.5 -. -.5-3. -3.5-4. 19 UK Eurozone (deviations from baseline scenario paths) Effective PPI inflation 3M EURIBOR Effective GDP growth Exchange rate USD/EUR (in pp) (in pp) (in pp) (in %) I/19.... II/19.5. -.4-4.8 III/19.7.1 -.5-5.3 IV/19.9.1 -.6-5.5 I/.9.1 -.6-5.7 II/.4.1 -.3-5.6 III/..1 -. -5.8 IV/ -..1 -.1-5.8 7
Sensitivity scenario hard Brexit Domestic economy: Lower growth (-1.1 p.p.) Weaker koruna implying higher inflation pressures and higher rates. (deviations from baseline scenario paths) CPI inflation 3M PRIBOR GDP growth Nominal exchange rate (in pp) (in pp) (in pp) (CZK/EUR) I/19.. -.1. II/19..3 -.8.3 III/19..4 -.9.4 IV/19.1.4-1.1.4 I/.1.4-1..5 II/.1.3 -.5.5 III/.1. -.4.5 IV/.1.1 -.4.6 7 6 Czech GDP forecast and hard Brexit scenario (% y/y growth) 8 7 Koruna FX forecast and hard Brexit scenario (CZK/EUR) 5 6 4 5 3 4 3 1 I/17 II III IV I/18 II III IV I/19 II III IV I/ II III 9% 7% 5% 3% confidence interval Hard Brexit scenario 1 I/17 II III IV I/18 II III IV I/19 II III IV I/ II III 9% 7% 5% 3% confidence interval Hard Brexit scenario 8
Monetary policy transmission: market Monetary policy rates passing through to money market rates up to 1 years. Longer end of yield curve has dropped Both on IRS and govt. bond market Global uncertainty about growth and price developments (and monetary policy reaction) has pushed longer yields down 3. Monetary policy and financial market interest rates (%).5 Govt. bond yield curve has flattened (%).5. 1.5. 1.5 1. 1..5.5. 1/14 1/15 1/16 1/17 1/18 1/19 W repo rate 3M PRIBOR 1M PRIBOR 5Y IRS. 1Y 3Y 5Y 7Y 9Y 11Y 13Y 15Y 1/18 9/18 11/18 1/19 9
Monetary policy transmission: clients Client rates have increased too Rates on loans to non-financial corporations exceeded 3% in H18 Rates on mortgage loans to households at.8% at end of previous year Credit standards have tightened mainly for household sector 4. 3.5 3..5. Reflecting new CNB recommendations on DTI, DSTI Transmission to client rates (%) 1.5 1/14 1/15 1/16 1/17 1/18 Czech Republic: loans to non-financial corporations Czech Republic: loans to households for house purchase Euro area: loans to non-financial corporations Euro area: loans to households for house purchase 1 8 6 4 - -4-6 Credit standards tighten (% of the market, positive = tighter standards) I/14 I/15 I/16 I/17 I/18 Loans to non-financial corporations Loans for house purchase to households Consumer credit to households 3
Credit market developments Growth in loans to private sector picked up slightly to 7.5% towards end of 18 Loans to NFC peaked at 8% in Oct, steady dynamics in household loans Among NFCs, it was mainly tertiary sector that contributed to acceleration of borrowing 1 1 8 Loans to private non-financial sector (y/y growth in %) 1 1 8 Structure of loans to non-financial corporations (y/y growth in %, contributions in p.p.) 6 6 4 4-1/14 1/15 1/16 1/17 1/18 Loans to non-financial corporations Loans for house purchase Consumer credit - -4 1/15 5 9 1/16 5 9 1/17 5 9 1/18 5 9 Manufacturing Other industry Real estate activities Other Trade Loans to NFCs Services 31
Summary Despite foreign weakness, Czech economy has shown resilience Labour market remains extremely tight, supporting wage growth and demand (both consumption and investment) Domestic price pressures counteracted by foreign antiinflationary factors, fostered by expected koruna exchange rate appreciation Consistent with recent CNB forecast is broad stability of market interest rates Risks of slower koruna appreciation and foreign trade disruptions would suggest need to increase rates 3
Thank you for your attention www.cnb.cz Vojtěch Benda CNB Board Member vojtech.benda@cnb.cz 33
External environment outlook: all down GDP growth in effective eurozone revised down. Producer price dynamics too. 3M EURIBOR outlook fell by a few decimal points. Brent oil price sharply down. 34
PMIs: close to signalling recession in EA 64 6 6 58 56 54 5 5 48 1/14 1/15 1/16 1/17 1/18 1/19 Germany Euro area Purchasing managers index in manufacturing >5: growth, <5: recession In Germany, PMI is indicating recession. Is this only temporary stumble caused by one-off factors? New emission standards, low waterline in Rhine, chemical industry disruptions. 35