Eurozone
- Solid Q3 GDP released last week for Austria and the total of the Euro Area.
- The conditions in the Austrian labor market keep improving amid the sound business cycle.
The Austrian economy continues a strong growth trajectory. According to the flash estimate from the Austrian Institute of Economic Research (Wifo), real GDP increased by 0.8 % (q/q) in the third quarter after it had expanded by 0.9 % quarterly in H1 2017 (trend business cycle component). In seasonally and working day adjusted terms (Eurostat), the quarterly increase in GDP was 0.6 % in Q3. The recovery is broad based across expenditure components. Both household consumption (0.4 % q/q) and fixed investment (07 %) as well as net exports make the economy grow. Exports and imports rose by 0.8 % each in Q3. In annual terms, GDP expanded by 2.6 % after 2.8 % in the previous quarter.
The conditions in the Austrian labor market continued to improve in October. According to the Public Employment Service Austria (AMS), the total number of unemployed amounted to 315.722 persons (excluding persons in training) and was 7.4 % lower than in the corresponding month last year. The unemployment rate was 7.9 % as per the national methodology and 5.6 % according to Eurostat (seasonally-adjusted). In September, there were 9 countries in the EU recording a lower unemployment rate than Austria. While youth unemployment has been declining, the trends among the elderly unemployed remained a cause of concern (Figure 1 - see pdf).
The number of unemployed persons aged 55-59 rose by 3.1 % and persons of age 60 or above increased by 10.0 % in October. Total gross industry wages increased by 2.9 % on average during the three months until August. Fostered by the solid business cycle, total employment has been expanding (1.8 % y/y in October). Employment in the manufacturing and construction sectors grew by 3.3 % and 0.8 % (y/y) in September (Figure 2 - see pdf).
As widely expected, the business cycle remained solid across the entire Euro Area. As per the first estimate, Eurozone GDP expanded by 0.6 % (q/q) and 2.5 % annually. Among further early Q3 GDP releases were France, Spain and Belgium. Uncertainty from Catalonia’s independence vote and political turmoil has not yet inflicted headline GDP growth. Real GDP rose by 0.8 % (q/q) and 3.1 % (y/y) in Q3 2017 in Spain. In France, the economy grew by 0.5 % quarterly and 2.2 % (y/y) and Belgium’s GDP rose by 0.3 % and 1.7 % yearly. Our GDP tracking estimate (as of 3rd November), that is based on a dynamic factor model, signals 0.6 % quarterly GDP growth in the final quarter of 2017 (Figure 3 - see pdf).
CEE: Czech Republic
- The Czech National Bank has increased its key interest rate by 25 basis points to 0.5 %.
- The corridor around the key rate was expanded to 95 basis points, keeping the discount rate unchanged at 0.05 %.
- Tighter monetary policy reflects a booming Czech economy with unemployment at its pre-crisis low.
- EUR/CZK exchange rate poses risk to the CNB’s inflation path.
Last Thursday (November 2nd) the Czech National Bank (CNB) took the next step towards monetary policy normalization by increasing the 2-week repo rate by 25 basis points to 0.5 %. The interest rate corridor was expanded to 95 basis points by keeping the discount rate unchanged at 0.05 % and increasing the Lombard rate by 50 basis points to 1 %. The rate hike was in-line with market expectations and the CNB’s forward guidance.
In August 2017, the CNB was the first CEE Central Bank to tighten monetary policy by increasing the 2-week repo rate to 0.25 %. In its November macroeconomic forecasts the CNB expects the inflation rate to be above the central bank’s 2 % target until Q4 2018 only reaching 2 % in Q1 2019. Compared to the previous macroeconomic forecast from August, the new figures reflect a 0.4 %-points upward revision for Q4 2018. In September 2017 inflation reached 2.5 % (HICP, y/y) while core inflation (HICP excluding energy and unprocessed food, y/y) was at 2.7 %. Nevertheless, long-term inflation expectations (3 years) are well anchored at the CNB’s inflation target of 2 %, based on a CNB survey among financial market participants (Figure 4 - see pdf).
Stable long-term inflation expectations reflect the CNB’s credible commitment to its inflation target. Tighter monetary policy by the CNB is, thus, intended to stabilise inflation over the monetary policy horizon. Inflationary pressure stems from a booming domestic economy. The unemployment rate has reached its pre-crisis low of 3.8 in September and gross manufacturing wages increased by 8.4 % in Q2. Economic growth has recently surprised to the upside with 4.7 % in Q2 (y/y, sa). This is also reflected in the CNB’s GDP forecasts for 2017, which was revised upwards by 0.9 %-points to 4.5 %. The PMI economic sentiment indicator further reaffirms the positive outlook recording a new peak at 58.5 in October. Using the PMI Manufacturing Index as a simple GDP forecasting tool for the third and fourth quarter of 2017 (Figure 5 - see pdf) predicts annual economic growth of 4.2 %.
Considering the slow and very gradual monetary policy normalization in the Euro Area, monetary tightening by the CNB implies widening interest rate differentials. The first rate hike by the ECB can only be expected after the end of the Asset Purchasing Programme (APP), so the central bank’s forward guidance. We do not expect the first rate hike by the ECB before the second half of 2019. The 3 months Euro interbank rate (EURIBOR) currently stands at -0.33, while the equivalent Czech interbank rate (PRIBOR) increased to 0.65 on Friday. This implies a current interest rate differential for short term rates of approximately 1 %-point. Until the end of 2018, the spread is expected to widen to 1.2 % with a PRIBOR rate of 1 % based on the latest update of the CNB’s forecast. This implies two further rate hikes by the CNB until the end of 2018.
These differences among the central banks’ rate hiking cycles should directly impact the EURCZK exchange rate. A stronger CZK cools down the economy by making Czech exports relatively more expansive. Moreover, a stronger CZK should act deflationary by lower import prices helping the CNB to achieve its inflation target. Based on a decomposition of Czech import prices, figure 6 (see pdf) shows that the appreciation of the CZK has had a significant deflationary effect on Czech import prices since June 2017. Euro Area producer price inflation of 3.3 % (y/y, avg. Jan.-Aug. 2017) has, however, counterbalanced the negative exchange rate effect for most of 2017. A slower than anticipated EURCZK appreciation would thus pose an inflationary risk which might lead the CNB to increase rates faster than expected.
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