Current Developments in the Czech Economy and Future Exit from the Exchange Rate Commitment Jiří Rusnok Governor, Czech National Bank CFA Society Forecasting Dinner 2017 Prague, 2 March 2017
Contents Current developments in the Czech economy CNB forecast (February 2017) Future exit from the exchange rate commitment J. Rusnok Current economic developments and exit from commitment 2
GDP (q-o-q and y-o-y changes in % at constant prices; seasonally adjusted) Source: CZSO Annual GDP growth slowed during 2016: 3% in Q1, 2.6% in Q2, 1.9% in Q3 and 1.7% in Q4 (preliminary CZSO estimate of 14 February); the growth was due mainly to household consumption J. Rusnok Current economic developments and exit from commitment 3
Potential output (annual percentage changes) Source: CNB The rate of growth of potential output (i.e. output produced at full capacity utilisation) is around 2.5% J. Rusnok Current economic developments and exit from commitment 4
Output gap (as % of potential output) Source: CNB The Czech economy is close to its potential output level, where it will stay over the next two years J. Rusnok Current economic developments and exit from commitment 5
Industrial production (y-o-y changes in %) Source: CZSO Seasonally adjusted industrial production fluctuated at relatively low year-on-year growth rates in recent months: 2.7% in September, 0.8% in October, 4.3% in November and 2.9% in December J. Rusnok Current economic developments and exit from commitment 6
Barriers to growth in industry (percentages) Source: CZSO The significance of labour shortages as a barrier to growth for industrial firms is increasing J. Rusnok Current economic developments and exit from commitment 7
Retail sales (y-o-y changes in %) Source: CZSO Growth in seasonally adjusted retail sales is slowing somewhat (4.8% in October, 4.6% in November and 4.3% in December) but remains relatively high; sales reflect favourable consumer sentiment J. Rusnok Current economic developments and exit from commitment 8
Unemployment (in %, seasonally adjusted) Source: MLSA, CZSO Unemployment is falling steadily; general unemployment rate: 3.7% in Q4; share of unemployed persons: 5.1% in Q4 and 4.9% in January 2017 J. Rusnok Current economic developments and exit from commitment 9
Beveridge curve (numbers in thousands; seasonally adjusted data; annual percentage changes for adjusted inflation) Source: MLSA, CZSO The number of unemployed persons declined steadily, while the number of vacancies increased slightly further; the labour market neared its 2008 peak J. Rusnok Current economic developments and exit from commitment 10
Unemployment in EU in Dec 2016 (as % of active population, seasonally adjusted) Note: Data for November 2016 for countries marked with an asterisk The Czech Republic currently has the lowest unemployment in the EU Source: Eurostat J. Rusnok Current economic developments and exit from commitment 11
Average wage (y-o-y change in %) Source: CZSO Given the low inflation rate, average real wage growth has been only marginally lower than average nominal wage growth since 2014; the real wage rose by 4% in 2016 Q3 J. Rusnok Current economic developments and exit from commitment 12
Inflation (y-o-y changes in %) Source: CZSO Consumer price inflation rose from 1.5% in November to 2% in December and 2.2% in January (monetary policy-relevant inflation was also 2.2% in January) J. Rusnok Current economic developments and exit from commitment 13
Structure of inflation (annual percentage changes; contributions in percentage points) Source: CZSO Inflation accelerated in the last three months owing mainly to fast growth in food prices; contributions of food prices to headline inflation: 0.6 pp in November and 0.8 pp in December and January J. Rusnok Current economic developments and exit from commitment 14
Industrial producer prices (annual percentage changes; contributions in percentage points) Source: CZSO The decline in industrial producer prices moderated markedly during 2016 H2 and increased by 2.1% in January; the recent developments were driven mainly by energy prices J. Rusnok Current economic developments and exit from commitment 15
Change in annual inflation in the EU (change between October and December 2016 in pp) Source: Eurostat Rapid acceleration in inflation was not limited to the Czech Republic; from October to December 2016, inflation rose by 1 pp or more in seven EU countries J. Rusnok Current economic developments and exit from commitment 16
CNB forecast (February 2017) J. Rusnok Current economic developments and exit from commitment 17
GDP forecast (annual percentage changes; seasonally adjusted) The economy will grow at an average rate of just under 3% Source: CNB J. Rusnok Current economic developments and exit from commitment 18
Headline inflation forecast (annual percentage changes) Source: CNB Headline inflation will increase further and converge to the 2% target from above at the monetary policy horizon J. Rusnok Current economic developments and exit from commitment 19
CNB forecast other variables 2015 2016(f) 2017f 2018f PPI (y-o-y in %) -3.2-3.3 2.4 1.6 Real wages (y-o-y in %) 2.4 3.7 2.8 2.7 Employment (%) 2.2 2.1 0.7 0.3 Unemployment (ILO) (%) 5.1 4.1 3.7 3.6 Gov. deficit (as % of GDP) -0.6 0.1 0.4 0.8 Gov. debt (as % of GDP) 40.3 37.6 36.3 34.5 Trade balance (as % of GDP) 4.6 5.6 5.0 4.9 Current account (as % of GDP) 0.9 2.0 1.3 1.5 The evolution of the koruna exchange rate following the exit from the exchange rate commitment is a bidirectional uncertainty The Bank Board assessed the risks to the forecast as being balanced J. Rusnok Current economic developments and exit from commitment 20
Future exit from the exchange rate commitment J. Rusnok Current economic developments and exit from commitment 21
Future exit from the exchange rate commitment The exit will mean that the CNB will return to the managed float regime under inflation targeting The exit will take place after conditions are created for sustainable fulfilment of the 2% inflation target even after the exit and there is no risk of a return to the use of unconventional measures (the CNB does not want to destabilise the economic environment: stop and go policy) The period of exceptional exchange rate stability, i.e. hedging for free provided by the CNB (macro-hedge), will end after the exit The execution of the exit will depend on the situation prevailing on the forex market As soon as the exit takes place, it will be communicated clearly The meeting on 2 February 2017: A majority of the board members consider it likely that the commitment will be discontinued around the middle of 2017 J. Rusnok Current economic developments and exit from commitment 22
Forex interventions (Jan 2013 Dec 2016) Source: CNB, Eurostat The intervention in November 2013 reached EUR 7.5 bn; cumulative interventions to defend the commitment from July 2015 to December 2016 totalled EUR 25.8 bn J. Rusnok Current economic developments and exit from commitment 23
Why the koruna need not appreciate markedly after the exit The koruna was slightly overvalued before the introduction of the exchange rate commitment The weaker koruna exchange rate following its weakening is in the meantime passing through to prices and other nominal variables Real equilibrium appreciation is slower than before the crisis Missing counterparty: exporters will be hedged and there will be no counterparty on the market closing long koruna positions The CNB will intervene if needed to mitigate potential excessive exchange rate fluctuations Expectations of a sharper appreciation of the koruna after the exit are not justified J. Rusnok Current economic developments and exit from commitment 24
Is the koruna misaligned? Source: CNB BEER = Behavioral Equilibrium Exchange Rate FEER = Fundamental Equilibrium Exchange Rate According to different models, the current koruna exchange rate is close to its equilibrium J. Rusnok Current economic developments and exit from commitment 25
Hypothetic koruna movements after exit ER commitment CZK 27/EUR EXIT depreciation appreciation M A N A G E D rather MANAGED excessive fundamentally unjustified ER weakening CNB ready to intervene exchange rate pass-through to prices and wages; missing counterparty CNB ready to intervene excessive fundamentally unjustified ER strengthening enhanced ER volatility period F L O A T rather FLOAT Ongoing long-term real and nominal koruna appreciation normal ER volatility period; ER will be determined predominantly by economic fundamentals; CNB does not intervene or only under exceptional circumstances The period of enhanced volatility will be limited; the exchange rate will then be determined mainly by economic fundamentals J. Rusnok Current economic developments and exit from commitment 26
Summary The Czech economy is now fully utilising its production capacity The growth is driven by household consumption and net exports Unemployment is very low and the labour market is exerting upward pressure on wages Inflation accelerated in November January owing to: a) food price growth, b) strengthening domestic demand pressures and c) weakening external disinflationary pressures Headline inflation will increase further and converge to the 2% target from above at the monetary policy horizon The Bank Board considers it likely that the exchange rate commitment will be discontinued around the middle of 2017 After the exit, the koruna will probably be rather volatile for some time; it should then start to follow an appreciating trend, although more slowly than before the crisis The exit from the exchange rate commitment will be a key event for the CNB; for the economy, it will mean a return to the exchange rate uncertainties experienced before the introduction of the commitment J. Rusnok Current economic developments and exit from commitment 27
Thank you Jiří Rusnok Czech National Bank Na Příkopě 28 115 03 Praha 1 jiri.rusnok@cnb.cz Tel: +420 224 412 000 J. Rusnok Current economic developments and exit from commitment 28