Dawn: Economy is doing better than the CNB expected, the Fed is leaving the tale of temporarily high inflation

Two months after the end of the third quarter, we finally have the opportunity to get acquainted with the detailed – although not all – results of the Czech economy. In the end, GDP growth was slightly better than the flash estimate suggested, which is quite a miracle given the situation in the automotive industry.

Suffice it to recall the summer situation in the automotive industry, which represents about a tenth of the economy as a whole, which led to a drop in passenger car production of almost 45% (measured by the number of cars produced). This could not but affect the performance of the whole industry on the one hand and exports on the other. In the end, “thanks” to stock production, the industry did not fall so sharply, but the main driver of GDP thus became inventories.

On the demand side, they were seconded by household consumption, which finally returned to the level of the end of 2019. Although households still spent about 5% less on services, purchases of goods have already compensated for this slippage.

Investment activity was quite subdued during this period. After its sharp rise in the second quarter, all forms of investment declined – from housing, through construction, machinery to means of transport. Due to increased risks and uncertainties, the coronavirus period does not want investment activity so far. Despite the continuing tensions in the labor market, which in “normal” times can act as a catalyst for investment, or until then still relatively cheap loans. Growth on the supply side was driven by services, specifically the sectors including trade, transport and the HORECA area.

The economic results significantly exceeded the CNB’s expectations, or its November forecast of one percentage point with weaker GDP growth, mainly due to faster household and government consumption. However, in the case of investment, the results remained far below the central bank’s expectations. In conclusion, perhaps it is enough to remind that at the end of the year, according to the CNB, GDP should fall by more than one percent due to problems in supply chains, while the tightening of anti-pandemic restrictions should remain without economic consequences.

*** MARKETS ***

Crown

The koruna strengthened during yesterday’s trading – similarly to other currencies in the region – and eventually returned to the EUR / CZK 25.50 level. After being startled by a report of a new coronavirus mutation last week, the situation is beginning to normalize, but the markets are still expecting a slower rise in CNB rates than they expected a few days ago. In this case, the governor’s moderate comment worked rather than covid.

Foreign forex

The US Federal Reserve is abandoning the tale of high inflation and is preparing to raise interest rates, which may begin as early as the end of the first quarter of next year. At least in this spirit, yesterday the Fed chief’s speech in the US Senate took place, which was unquestionably a hawk. Powell said central bankers will talk at the December meeting on how to speed up the end of bond purchases. Interestingly, the Eurodollar did not react to Powell’s clearly hawkish words (which, after all, also applied to record high inflation in the euro area – it reached 4.9% year on year in November).

Today, J. Powell will repeat his speech at the congress, but let’s not expect dramatic surprises like yesterday. However, data from the US labor market (ADP report) and business sentiment from industry (ISM) may be more important for the market. Both indicators are likely to be very strong and may support the dollar.

Polish inflation also surprised a very high number in November, so the NBP will have to aggressively tighten monetary policy next week. The year-on-year inflation rate rose by 1% last month, which represents 7.7% year-on-year. Although the positive inflation surprise this time is mainly for energy and fuels, such high inflation will be difficult for the Polish central bank to tolerate. This was also reflected in the first comments of the members of the Monetary Policy Committee, which were clearly hawks. Indeed, real inflation is above the recently published inflation forecast, which at the last meeting led to a very surprising increase in official interest rates by 75 basis points. However, given the very high November inflation figure and other favorable macro data (GDP for the third quarter or strong October data), our initial estimate of an increase in NBP rates of 50 basis points in December seems very modest. Rather, let’s expect the NBP to respond in a hawkish way, which could mean raising the official rate by 100 points.

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