Czech Economy: Growth Without Inflation? Eva Zamrazilová Chief economist Czech Banking Association THE 10 th INTERNATIONAL DAYS OF STATISTICS AND ECONOMICS Prague, September 8, 2016
Introduction: basic facts Czech economy : small and open 10.5 million of inhabitants GDP per capita: 15 600 EUR (PPS) 85 % of EU average 68 % of German level EU member as of 2004, non-emu member Currency: CZK, Exchange rate: 27.0 CZK/EUR Monetary policy regime: inflation targeting Inflation target : 2 % (consumer price index)
Basic story of previous years 15 10 5 0-5 -10-15 Source : CZSO Consumption of households, %, y/y Government consumption, %, y/y Investments, %, y/y GDP, %, y/y Big slump (crisis) in 2009 followed by moderate growth 2010-2011 Recession 2012 2013 Q2/2012- Q3/2013) Rapid growth in 2015 followed by expected moderate slowdown in 2016 In 2015, one-off factors contributed strongly, namely the EU funds GDP growth expected around 2.5 % in 2016
01/07 06/07 11/07 04/08 09/08 02/09 07/09 12/09 05/10 10/10 03/11 08/11 01/12 06/12 11/12 03/13 08/13 01/14 06/14 11/14 04/15 09/15 02/16 4,5 4 3,5 3 2,5 2 1,5 1 0,5 0 Monetary policy and inflation 8,0 7,0 6,0 5,0 4,0 3,0 2,0 1,0 Source : CNB, ECB, CZSO ECB CNB 0,0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 CPI, %, y/y Inflation target CNB loosened its monetary policy as of October 2008 similar to other central banks Monetary policy rate (2 week repo rate) hit the zero lower bound in November 2012 Inflation below target as of the beginning of 2013 Temporary increase of CPI was caused by VAT hikes in 2012 and 2013 The inflation forecast indicated short period of deflation in Autumn 2013
Exchange rate commitment of CNB 38 35 32 29 26 23 1.99 1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 1.15 1.16 Source : CNB CNB started to use exchange rate as a tool of further easing of monetary policy ER commitment : CNB will intervene against appreciation of CZK above 27 CZK/EUR ER commitment was adopted in November 2013, with expected exit in Q1/2015 (when the inflation should have reached 2 % according to November 2013 forecast) However, the fulfilment of 2 % headline inflation target was not the case, so that ER commitment was prolonged In 2015 the average annual inflation was at 0.3 %, even though GDP rose by 4.3 %, y/y At the moment exit seems probable in mid-2017 however it will not be a trivial task
Growth above expectations, inflation below. 4,5 4 3,5 Reality of GDP growth Q1/2015: 4.6 %, y/y 3 2,5 2 1,5 1 0,5 0 Listopad 2013 Únor 2014 Květen 2014 Červenec 2014 Listopad 2014 Únor 2015 Květen 2015 Srpen 2015 Reality of CPI Q1/2015: 0,1 %, y/y The exit from FX commitment formerly expected in Q1/2015 - CPI should have reached the target and GDP growth was expected around 3 % GDP growth under zero inflation or even mild deflation is a new macroeconomic experience (similar to Sweden, Slovakia, Poland, etc) The fears from deflationary spiral had been most probably overshooted
Structure of inflation (2005=100) 165,0 168,6 155,0 145,0 135,0 125,0 115,0 130,4 124,3 105,0 95,0 85,0 75,0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016/H1 79,5 Total CPI Food Alkohol, tobacco Footwear, clothing Costs of living Equipment of households Health Transport Telecom and postal Source: CZSO The development of price level is differentiated Long-term desinflationary pressures (telecommunications, housing equipment, clothing and footwear) Tobacco and alcoholic beverages, water supply, some energies House prices are not included in CPI
Monetary indicators and bond prices 140 Money supply M2 120 10 year bonds 100 CPI, 2008= 100 80 yyyy yyyy yyyy yyyy yyyy yyyy yyyy yyyy Index Bloomberg/EFFAS dluhopisů splatnosti nad 10 let Index spotřebitelských cen (CPI) Měnová zásoba M2 The volume of money has been rapidly increasing in contrast to CPI Consumer price level rose by around 10 % since 2008 M2 volume increased by almost 40 % since 2008 State bond prices (over 10 years) rose by more than 25 % since 2008 These have been further indicators of overheating However, the CPI inflation remains below target. (expected to be reached in mid-2017)
Consumer prices and house price index 18 16 14 12 15,2 13,4 12,5 10 8 6 4 2 0 3 3,5 4,5 4,5 7 4,5 2 6,3 0,6 7,4 7,4 3,4 4,8 2,6 5,1 1 6,9 2,6 5 0,8 0,6 8-2 -4-1,2-1,2 Source : Eurostat HICP HPI While CPI remains low, house prices have been booming in part of EU (Sweden, Denmark Austria, Germany) The situation is similar to USA in 2001 2004 the housing bubble was downplayed by Fed Reinhart and Rogoff (2009) place the HPI (house price index) to the top of the list of indicators warning about the risks of financial crises Czech National Bank is closely monitoring the housing market and has already introduced macroprudential measures However, it is a question, whether macroprudential policy may stop the housing boom if the important factor is the zero deposit interest rate.
120,0 110,0 2005=100 Indicators of confidence 100,0 90,0 80,0 70,0 60,0 Business indicator Consumers Source : CZSO Indicators of confidence have reached the pre-crisis levels Consumers have been profiting from low unemployment, increasing wages and low inflation Exports (mostly manufacturing industries) have been supported by solid foreign demand Services have been supported mostly by solid domestic demand Construction is the only industry performing poorly evaporation of one-off factors (EU funds)
Harmonized unemployment rate 30 25 24,4 20 20,5 15 10 5 10,2 6,3 8,6 4,7 10,2 5,8 4,1 5,8 8,5 6,3 7,3 4,2 6,8 12,1 5,8 11,4 10 5 0 EMU LUC IR MT SK HU CZ NL BE EE BG DE PL PT AT ES IT EL FR UK Source : Eurostat In June 2016, the unemployment rate in CR was the lowest in EU Labour market figures at historical records, low unemployment, high demand for labour Structural mismatch has started to be a barrier for higher growth
Forecast for 2016 and 2017 2016 (f) 2017 (f) GDP 2.5 2.6 Unemployment (domestic methodology) 5.6 5.3 Inflation 0.6 1.8 Household consumption 3.0 2.7 Investments 0.5 3.4 Eurozone GDP 1.5 1.5 Euro exchange rate 27.02 26.80 3M PRIBOR 0.29 0.30 Balance of government institutions -0,7-0.8 Government debt 39.8 39.1 Loans to businesses 6.0 5.0 Loans to households 7.2 5.5
Risks and uncertainties External Geopolitical risks Oil prices currently expected around 50 USD/per barrel in 2017 Brexit the impact is very dfficult to estimate at the moment Banking sector in some eurozone countries Domestic The exit from FX commitment will crucially depend on external (ECB policy, eurozone growth) and domestic conditions (intensity of demand) In good times shocks are better absorbed Smooth exit will depend on communication and strategy of exporters old saying: It is only when the tide goes out that you see the rocks. (Or Warren Buffet s variant: It is only when the tide goes out that you see who has been swimming naked. )
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