CZ: Improvement in industry affected by one-off factors
Industrial production in Czechia rose by 1.8% month-on-month in August, marking a 0.4% increase year-on-year. These figures are adjusted for calendar and seasonal variations, with the calendar-adjusted year-on-year growth standing at 1.5%. The relatively high discrepancy between the two year-on-year figures suggests a potential for future revisions. Nonetheless, the data exceeded expectations, presenting a positive view.
However, a closer examination tempers the initial optimism. Industrial production exhibits significant month-on-month volatility. In August, the sector was notably impacted by the July decline in car production, attributed to the rescheduling of the company holidays in the automotive sector to July. When considering the combined data for July and August, industrial production remained approximately flat year-on-year. Overall, the Czech industrial sector continues to face challenges, as the recovery in domestic demand has not been sufficient to counterbalance the tepid demand from Germany.
Floods are anticipated to impact industrial production in the coming months. For September, we project an overall decline in the industry, although estimating the precise impact remains challenging. In subsequent months, a countervailing effect is expected. However, a comprehensive improvement in Czech industry is unlikely until next year, coinciding with an anticipated rise in foreign demand. For the years 2024 to 2026, we project industrial production growth rates of -1.5%, 2.6%, and 3.1%, respectively. Considerable uncertainty persists due to global and geopolitical developments.
The impact of today's data on the Czech National Bank's (CNB) monetary policy and the koruna exchange rate is expected to be minimal. The data do not alter the overall perspective on the Czech economy, as the favorable growth in industry is primarily attributed to the one-off factor of the timing of the company holidays. Consequently, we maintain our expectation of a 25-basis-point rate cut of the CNB key rate in November.
Uncertainty persists for December, when the CNB is likely to choose between a 25-basis-point rate cut and maintaining rate stability. This decision will be influenced by forthcoming data, the next rate decisions by the ECB and the Fed, the performance of the koruna post-U.S. elections, wage trends, price developments in the service sector, and the geopolitical landscape. Recent data from the German economy and the significant drop in fuel prices increase the likelihood of a December rate cut to 3.75%. Conversely, the current rise in oil prices, driven by Middle Eastern tensions, is inflationary and suggests rate stability. Greater clarity is expected in November.
The koruna has recently depreciated to approximately EUR/CZK 25.40, influenced by favorable U.S. labor market data released on Friday and rising uncertainty in the Middle East. The extent of this weakening is roughly equivalent to the impact of a standard rate cut, thereby increasing the likelihood of rate stability at the December meeting (if no correction occurs). Following today's data, we do not anticipate significant changes in the koruna's trajectory, as geopolitical factors will remain the primary influence.