CZ: Industrial production to improve next year

Industrial production in the Czech economy decreased by 0.8% month-on-month in July. On an annual basis, the output declined by 1.9%. The decline in production was influenced by the timing of the full-holiday period in the automotive industry, thus we do not interpret the data as negative despite the pronounced month-on-month decrease. Nonetheless, the overall situation in the Czech industry remains subdued, as the recovery in domestic demand has not compensated for the weak demand from Germany.

Sentiment in the industrial sector remains below its long-term average, driven partly by weak foreign demand and concerns among industrial firms regarding future macroeconomic developments. The value of new orders has declined significantly, by nearly 9% month-on-month, although it had been rising robustly prior to this. Given the potential influence of holiday periods and monthly volatility, it is premature to draw definitive conclusions from the data.

An improvement in industrial production is likely to materialize only in the autumn and, more prominently, next year, in tandem with the anticipated recovery in external demand. Nevertheless, monthly data may continue to exhibit volatility.

The impact of today's data on CNB monetary policy and the koruna exchange rate is expected to be very small. We maintain our forecast of a 25-basis point rate cut in both September and November. However, there is heightened uncertainty for December, as autumn macroeconomic data and the koruna's performance following the US elections could prove decisive.