CZ: Industrial production affected by weak foreign demand

In November, industrial production fell unexpectedly sharply by 1.5% month-on-month. Year-on-year, instead of the anticipated -0.5%, output in the Czech economy declined by 2.7%. The primary reason for this unfavorable data was developments in Germany and the associated weak foreign demand. The weaker production mainly affected sectors producing components for the automotive industry, such as various parts and tires. Consequently, significant month-on-month declines were observed in car manufacturing, plastics production, and the chemical industry.

The value of new orders fell by 1.5% month-on-month, driven by lower orders from abroad. In contrast, the value of domestic orders increased month-on-month. The PMI for the Czech Republic and Germany, the development of the mood in the Czech industry and the German IFO are also unfavourable for the end of last year. Therefore, for the turn of the year 2024/25, it is rather necessary now to count on a further possible deterioration in the development of the Czech industry.

Today's unexpectedly unfavorable data pose a risk of worse industrial performance (compared to our forecast) for the end of last year and the beginning of this year. However, we still expect improvement during this year, mainly due to a gradual improvement in foreign demand. For 2024 and 2025, we expect industrial production to arrive at -1.1% and 1.3%, respectively. Nonetheless, the automotive industry's outlook remains a main risk.

The Czech National Bank meets at the beginning of February, and the situation remains uncertain. The decision will likely be between maintaining stable rates and a slight reduction. We currently see the probabilities of both options as very similar, with the decision potentially hinging on data and information released in the coming weeks. In this regard, the preliminary estimate of Czech inflation for January, due shortly before the CNB meeting (both on February 6), could be crucial. At this point, we slightly lean towards a rate cut in May, but a reduction in February would not be a major surprise, as the CNB will consider both options.

Today's data slightly increase the likelihood of a possible rate cut as early as February, but they do not significantly change the overall picture or uncertainty.