Economic growth prospects in the 1st century in CEE Economic growth prospects in the Czech Republic Petr Král Deputy Executive Director, Monetary Department Czech National Bank 1 September 18 Krakow
Economic good times in the Czech Republic will continue 8 6 - I/1 I/15 I/16 I/17 I/18 I/19 I/ Household consumption Net exports Gross fix. capital formation Government consumption Change in inventories Gross domestic product 1-1 - - - -5 I/9 I/1 I/11 I/1 I/1 I/1 I/15 I/16 I/17 I/18 I/19 I/ Small structural model Production function Consumption and investment will contribute to ongoing swift GDP growth over the entire forecast horizon; the contribution of net exports will temporarily be negative this year. According to the small structural model the positive output gap will close gradually. This is consistent with a still tight labour market situation and strong domestic and to a lesser extent external demand. By contrast, the production function suggests a less open output gap at present but a steady widening of the gap over the entire horizon.
Potential output growth estimated at % 5 Potential output growth 5 Potential output growth contributions 1-1 I/9 I/1 I/11 I/1 I/1 I/1 I/15 I/16 I/17 I/18 I/19 I/ Small structural model Production function 1-1 - I/98 I/ I/ I/ I/6 I/8 I/1 I/1 I/1 I/16 I/18 I/ TFP Labour Capital stock Production function According to the small structural model, potential output growth accelerated to % but will gradually slow; according to the production function, it will fluctuate around %. Capital stock increases have been generating a relatively stable contribution to Y* growth when identified by a standard Cobb-Douglas production function. Variations in ΔY* are rather caused (explained) by TFP and labour force contributions.
Breakdown of fixed investment (% y-o-y; contributions in pp) (% y-o-y; contributions in pp) 1 15 9 1 5-5 -1-15 I/1 I/15 I/16 I/17 I/18 I/19 I/ Private investment Public investment Change in inventories Gross capital formation 6 - -6-9 I/1 I/1 I/1 I/15 I/16 I/17 I/18 Gripen Aircraft Cultivated assets Intellectual property products Other buildings and structures Dwellings Transport equipment ICT, other machinery and equipment Gross fixed capital formation Gross capital formation will rise due to continued growth in private investment (mainly by NFCs) and government investment partly co-financed from EU funds. Solid growth in external demand combined with a tight domestic labour market will spur additional investment in the business sector, fostering an increase in labour efficiency (productivity gains). Investment in buildings, dwellings and machinery dominates the structure. This also reflects firms efforts to streamline production amid labour market constraints.
Fixed investment dominates NFC loans and perceived demand 1 1 8 6 Loans to non-financial corporations (contributions in pp) - 1/15 5 9 1/16 5 9 1/17 5 9 1/18 5 Changes in NFC demand for loans based on BLS (net percentages, positive value = demand growth, negative value = demand decrease) Manufacturing Other industry Real estate activities Other Trade Services Loans to NFCs Note: Other comprises transport, construction and agriculture. The growth in loans to NFCs is mainly due to increasing loans to manufacturing, construction and transport. As indicated in our Bank Lending Survey, fixed investment is a regular and solid source of perceived demand for NFC loans. 5
Labour shortages as a barrier to growth in industrial production Barriers to growth in industry (percentages) (annual percentage changes in employment; general unemployment rate in percentages; s.a.) 1, 1 8 6,5, 9 8 7 1,5 6 5 1, 1/5 1/7 1/9 1/11 1/1 1/15 1/17 Insufficient demand Labour shortages Material shortages Financial constraints Other None,5, I/1 I/15 I/16 I/17 I/18 I/19 I/ Employment General unemployment rate (right-hand scale) Nominal wages in market sectors (right-hand side) 1 Labour shortages continue to be the most important constraint on the production growth of industrial corporations. Total employment will rise at a substantially slower pace than before, while the decline in the unemployment rate will moderate. The exhausted labour market has led to accelerated nominal wage growth. 6
Is investment motivated by capital/labour switch? Employment and the labour force (annual percentage change, age 15 years or more) 1 Decomposition of labour force growth (annual percentage change, contribution in pp, age 15 or more) 1,5 1,,5, -1 - - I/1 I/11 I/1 I/1 I/1 I/15 I/16 I/17 I/18 Employment Labour force -,5-1, -1,5 I/ I/6 I/8 I/1 I/1 I/1 I/16 I/18 Demography Participation Labour force Ongoing robust economic growth is pushing up employment, which is deepening labour market tightness. Vacancies are filled partly by the unemployed and partly by inactive persons. Labour force growth is driven by the participation rate, mainly due to part-time employment (group of elderly people and women with children). The potential labour force reserve, consisting of persons who are not actively seeking a job but are willing to work, has fallen markedly. 7
Long term dynamics productivity and investment The CNB assumes that the increase in (DSGE-model-filtered) labour efficiency will peak in 18 and then gradually slow down. This is in line with private investment growth, which culminated in the first half of 18. In second half of 18, whole-economy labour productivity (HP-filtered GDP/employment) dynamics will slow slightly and will begin to converge to the pace of private investment growth at the beginning of next year. 8
Spring forecast sensitivity scenario labour efficiency This scenario, in which the forecasted wage dynamics are accompanied by lower/higher labour efficiency growth, implies slightly higher/lower inflation, resulting in a higher/lower trajectory of interest rates and a consistently lower/higher GDP growth outlook. 9
Concluding remarks The Czech economy is supposed to grow faster than western countries due to the catching-up process at least in the next decade or two. Simultaneously, our economic situation is strongly tied to developments in our major trading partner countries. Therefore, risks arising from growing protectionism in global trade are highly relevant for the Czech Republic as a small open, industrial, exportoriented economy. So, the possible increase and spreading of protectionist measures in global trade or even trade wars between USA, the euro area and other global players represent a substantial source of external uncertainty for our economy with a potentially marked negative effect on its growth. But even in a small open economy, domestic economic factors and policies can sometimes cause economic activity to diverge from the balanced growth path and/or from what we observe abroad, as we have seen in our recent history. 1
Thank you for your attention www.cnb.cz Petr Král petr.kral@cnb.cz Deputy Executive Director Monetary Department Czech National Bank 11