The Czech economy has recently seen solid expansion and a bottoming out of inflation. This has been accompanied by appreciation of the crown to close to the EUR/CZK 27 floor set by the Czech National Bank. We expect the stream of positive data to continue, which could trigger an attack on the currency floor. The central bank should maintain its policy, though, as scrapping the floor would result in renewed disinflationary pressures. The Czech Republic has seen rapid economic expansion so far this year, and the batch of data published recently has reinforced this trend. Strong May retail sales confirmed the boom in domestic demand, which has supported the current cyclical recovery. This marks a striking difference to the recovery of 2010, which was driven by external demand and was therefore fragile, notes Societe Generale.
On the supply side of the economy, construction activity saw further massive growth in May. The boom in the sector has been driven mainly by a strong inflow of EU funds as the country draws the last of its funds for the 2007-13 programming period. A significant portion of this EU money is being targeted at infrastructural works: Indeed, civil engineering has posted immense growth of 23% yoy. On the other hand, industrial production has fallen behind expectations, contracting on a month-on-month basis in June (-0.5% mom). However, it is believed that, this figure is merely a mere correction of April's solid print (+0.8% mom). The pick-up in economic activity has resulted in a tightening labor market. In June, the unemployment rate fell to a six-year low of 6.2%. Meanwhile, the number of job openings reached 97k (the highest figure since November 2008), while the number of jobless was at 451k.
"The expanding economy has resulted in accelerating inflation. While in early 2015 prices increased by only 0.1% yoy, inflation reached 0.8% in June. Although it printed below consensus (0.9%), it was nevertheless the highest figure in 18 months. Inflation has been dragged back by the drop in fuel prices (in year-on-year terms). Core inflation, though, stood at 1.2% yoy in June", says Societe Generale.
