CZ: Industry expected to improve next year

In October, industrial production fell by 0.7% month-on-month. As in previous months, this decline was influenced by weak foreign demand, particularly from the German economy. While the recovery in domestic consumption is exerting an opposite effect, its impact is insufficient to offset the subdued foreign demand. Year-on-year, industrial production was 2.1% lower. These figures are below our forecast, as we anticipated a milder year-on-year decline in production, a view shared by the market. One contributing factor is the upward revision of September's data.

The value of new orders declined month-on-month (-0.5%), though it remains higher year-on-year compared to last year (2.3%). However, the current economic situation in Germany is evident in their development, with recent data giving way to renewed cooling. This could negatively impact Czech industry in the coming months. A similar picture is suggested by leading indicators, with the PMI for manufacturing or sentiment in Czech industry.

Amid significant month-to-month data volatility, industrial production remains weak, negatively impacted by the stagnation of the German economy. Rising household consumption cannot offset low foreign demand. An improved development could gradually occur next year, but risks remain high, pointing towards weaker production growth. For the years 2024 to 2026, we anticipate industrial production growth of -0.9%, 2.2%, and 3.2%, respectively.

Overall, we do not expect today's data to significantly influence the CNB's rate decision next week or the koruna's trajectory. Tomorrow's Czech inflation figures for November may prove more insightful in this regard.

At the December meeting, the CNB will likely decide between maintaining stable rates and a modest 25-basis-point cut. We slightly lean towards rate stability, though a minor reduction wouldn't be a major surprise. The market shares this view, also slightly favoring stability. We currently anticipate the next rate cut at the May meeting, while the market expects February. Overall, we foresee only very gradual rate reductions towards the 3% level over the next two years, which we consider an equilibrium point where the CNB can pause, barring new inflationary or deflationary impulses.