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Unemployment

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The unemployment level in the Czech Republic is steady since several months. For December 2013, data show a 6.8% rate for the active population, or 8.2% general. The recently implemented new estimation system shows levels lower than the recent past, but it is just an illusion.

Even if the unemployment levels are better than in several EU countries (EU average for December was 10.7%), the fact is that the job market situation is critical. Several regions have basically no real short term hope for structural new jobs opportunities. Even where the economy is growing, the push towards better efficiency and productivity effectively reduces the creation of new jobs. As usual with the exception of the Prague region, where there is basically full employment. The reason is of course the general tendency in the EU, but also the effect of several years of exaggerated growth of labour cost vs. productivity, and the unwillingness of the labour force to relocate, so if there is no job just down the street, many prefer to just collect the all too generous subsidies.

The outlook for the coming months is quite negative, since it is already clear that we are going to experience a jobless recovery in Europe.

Industrial production

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Strong growth in November for the industrial production, +6.2%. Preliminary data to December indicate as well an increased output, on a y-on-y basis. Most importantly, new orders are growing at a rapid pace. In November, more than +12%. All dandy then, for the industrial sector? Not necessarily. Even with a strongly growing output, there are no signs nor of new jobs creation, nor of increasing salaries in the sector. Albeit weak, the recovery in Europe is certainly helping the local industrial sector. But mainly the currency devaluation is having the effect of making cheaper the production of labour and capital intensive goods, increasing their attractiveness on the worldwide markets. Although the international automotive market is not growing, this sector remains very strong in the Czech Rep. and regularly gives a major contribution to the nice performances of the local industry. It remains to be seen during the next few months the effect of the depressed domestic demand, consequence of the currency devaluation and reduced consumers power of purchase. Shall that be compensated and more by the growth of industrial orders and production granted by the increased competitiveness of goods destined to exports?

Inflation

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Official data don’t show yet the full extent of the CNB intervention that devalued the Crown. The last data record an inflation rate y-on-y of 1.4%. But the fact is that the CNB intervention changed the playing field. On the one hand, during 2013 the country experienced stagflation in several sectors, namely services, construction, etc. That mitigated the overall inflation level, but it not always reflects into the consumer’s pocket. On the other hand, the cost of imported goods is going to increase a lot. This is at worst neutral for exporters but for the families it translates in higher expenses for goods, or lower purchasing. The hopes of the CNB rely on mainstream economic theories, that the controlled devaluation determines import of inflation and therefore a positive faster monetary circulation that trigger a faster economy. But, given the more and more apparent stagflation risks in the whole EU area, the hope for result is not certain, and the net effect could actually be negative for the common folk. It is not a coincidence that CNB is now loved more than ever in Brussels, but subject to harsh criticism at home, mainly by whom see the de-facto fixed rate CZK-EUR as preparation to Euro adoption. This is feared as a carrier of unemployment, demand compression and general impoverishment for the common folk.

Foreign trade

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The foreign trade data are perfectly aligned to the last several months trend. The trade balance was in strong growth also in November 2013. The y-on-y increase by 5bn CZK, determined the record 39bn CZK active position for the trade balance. Both exports and imports grew in CZK, by 7.4% and 6.3%. Obviously, the currency devaluation greatly influences upwards those figures. When indicated in Euro, export grew by 1.2% y-on-y, and imports basically remained steady. As always, the automotive sector is the strongest one. It exported 9bn CZK more, y-on-y. And again as usual, very good performance vs. EU markets: the positive trade balance grew by a hefty 6bn Crowns, reaching 73bn. The ever present trade deficit with non-EU countries kept steady at just under 34bn. China as always is the main import partner, with whom the gap increased by 1.4bn. But actually when considering the Crown devaluation, that growth is really quite meagre.

It keep baffling us, all the more after looking at the latest data, how there still is quite a large chunk of experts and badly informed citizens who look forward to the adoption of the Euro currency. They clearly do not realize that the positive trade balance, especially for a small country such is the Czech Rep., is due almost solely to independent money and state debt management in local currency.

by Gianluca Zago