The unemployment level slightly improved in April. The active population unemployment was at 6.5%, or 7.9% overall. Preliminary data for May indicate an improvement too, albeit marginal. The figures are still quite high, though much lower than the Eurozone. When looking at the good industrial performance and the GDP improvement in the last few months, one must once again note that the recovery is not generating enough new jobs. There are also doubts about the incentive programs to attract FDI, which tend to attract companies that end up offering low-end jobs, often to immigrants, at the bottom of the pay scale. This, of course, is not really improving the general state of the economy or generating new jobs; on the contrary, it depresses the average income levels. The Prague region is as usual almost at full employment, for several reasons, among which the strong service industry and tourism. Sadly, large parts of the country don’t seem to find a way to improve their jobless situation. One of the reason is the too-generous welfare system, which grants a dignified standard of living, albeit lazy, in the poorest areas of the country.
Very nice performance for the industrial sector in April too. The output grew by 7.7% y-on-y, at constant prices. As usual, export is once again the main engine of the industrial sector. Unfortunately, the domestic demand for goods is still very poor, with dire consequences on the economic and social fabric of the country. Forward looking, that is not very good news for the industrial sector, since it creates pressure towards the appreciation of the crown. But when domestic demand is lackluster, the only way to be competitive is increasing productivity at least as much as the currency appreciation. In other words, cutting salaries, as it happened in southern European countries in the last decade. Also new orders for industrial goods grew by 14% in April, giving a positive outlook for the coming months. As usual, automotive is the strongest sector, but also electronics is nicely growing. For the first time in months, we see improving the occupational level at companies with more than 50 workers.
No good news on the inflation front. After a slight increase due to the devaluation of the crown, we are back to a de facto deflation. CPI for May was recorded at 0.8%, which is a very bad figure. Although it eventually seems that even the ECB, albeit extremely late, has realized that the pedantic and blind war on inflation is a disaster for the domestic demand almost everywhere. The Czech Rep., even with an independent central bank, is not strong enough to be immune to the dumb monetary policies of the Eurozone. The devaluation of the crown didn’t actually produce the hoped results, since the currency is cheaper but the stagflation still persists; therefore, a double negative effect, both on the state budget and on the job market. If the government had the strength to oppose the anti-monetaristic stance in Brussels and Frankfurt, it will foster a climate conductive to massive QE choices by the Czech Central Bank. It seems that once again there are pressures for a quick euro adoption. But the path required for the process is that of a steady exchange rate to 27, and inflation freezing. Exactly what the country does not need.
Strong positive trade balance in April, by 16bn crowns. On a y-on-y basis, a very nice growth by 1.5bn. As usual, the surplus is very large with EU area, by 53bn crowns. And as usual, it is again in negative territory with Asian countries and Russia, by 4bn crowns.
Exports improved by 10.8% on a yearly basis, and imports grew by 9.2%. It is interesting to point out that, due to the crown devaluation, exports and imports in euro grew only by 4.3% and 2.8%. In any case, very strong figures. It is clear how important exports are for the Czech economy. So important in fact, that sometimes there is the tendency to depress the domestic demand in order to keep the export prices attractive. This is manageable, even if difficult, when a country is in control of its own currency. But if the euro adoption path would continue, there won’t be any other measure to protect export prices than to systematically depress domestic demand and workers’ salaries.
by Gianluca Zago