Moderate growth, falling unemployment, sharply rising wages in the private sector, and a recovery of inflation based largely on wage settlement are the picture for the Czech Republic outlined by the central banks latest update of its economic forecast.
The bank has notably upped its growth expectations for this year but dropped them for 2016 and 2017, left its interest expectations largely unchanged, and sees slightly higher price rises for the early part of this year but a slower rise to its 2.0 percent target than it earlier hoped for.
On the growth figures, the main reasoning for the drop in growth from a higher 3.8 percent this year to lower 2.8 percent in 2016 and 2017 is a last gasp attempt to spend European funds this year. A new programming period for EU funds starts in 2016 and projects are not expected to start to be really up and running until 2017. This year’s economic boost from lower oil is expected also to ebb in the following years. The growth of Czech exports is also expected to weaken as 2016 runs into 2017.
A large part of the bank’s inflation expectations are based on how the bank sees wages rising sharply in the country. Wage growth in the private sector is seen climbing to around 4.5 percent annually over the next two to three years from around 2.8 percent now. Wage growth in the public sector though will stabilize though at around current levels over the period. The other impulse for price rises will be a turnaround from the current state of falling prices for imported goods to a slight rise in the prices of imports from mid-2016.
The bank defends its high wage growth figures, in spite of lower economic growth in 2016 and 2017, on the grounds that it has taken time for the effects of the long economic recession to recede and for Czechs’ expectations of bigger wage packets to strengthen. Some of the earlier growth in output was covered by overtime but recruitment is now increasingly covering extra demand and unemployment is seen on the decline throughout the whole period until the end of 2017.
For many currency traders and exporters, when the central bank will end its low crown policy and how the currency will react once that happens is of the upmost question. Here, the bank is keeping to the mantra that the policy will remain in place until at least mid-2016 and the speed at which the target rate of 27 crowns to the euro is dropped after then depends on how quickly and how firmly the 2.0 percent inflation goal has been achieved. Higher inflation should bring higher interest rates in their wake and the return to more conventional monetary policy based on interest rates not foreign currency interventions.
The Czech National Bank though is sticking to its guns that the Czech crown should only appreciate mildly once the low crown policy is abandoned, by around 1.5 percent at the most.
The reasoning here is that the bank believes the crown was too strong before the low crown policy in November 2013. It also believes the lower level has become rooted in many aspects of economic activity, and that economic fundamental in the Czech Republic and euro zone are not so great to justify a sharper appreciation of the local currency. Many analysts appear more skeptical about this mild rebound scenario so it will be interesting who is proved right.