In December, industrial production grew 0.2% mom (SA). In year-on-year terms, after deducting the year-on-year calendar benefit of two working days, this means an increase of 0.5%. Data without calendar effects show an expansion of 5.7% yoy, which was about one percentage point above our estimate and the market median. There was no significant surprise. Analysts, on average, expected a decent result, and that roughly came true.

The year-on-year growth rate of new orders decreased to 11.2% after the previous increase of 1.1%. The positive news is that the year-on-year decline in employment in industry continued to fall to 3.5% from the previous 3.8%, and the year-on-year increase in average wages in manufacturing accelerated to 6.0% after a previous increase of 3.4%.

Domestic leading indicators show the expansion of industrial production at the beginning of this year. However, the limit will be the problem with the supply of components, labour shortages and the probability of fluctuations in foreign demand due to the worsened pandemic situation. Exports to the United Kingdom, where pre-supply took place before the end of the year, could also be weaker in the near future. We expect a slight qoq decline in industrial production in the Czech Republic in the first quarter. Then we expect a return to growth. For the whole of 2021, given the low base effect, we expect industrial production to grow slightly less than 10%.

Strong industry and low imports = another strong foreign trade surplus

The decent performance of industry corresponds with strong data on the development of the trade balance, where its surplus reached CZK17.7bn in December. This means an improvement of CZK25.9bn yoy. On a month-on-month basis, seasonally adjusted exports decreased 1.1% and imports 3.1%. Year-on-year, in December exports grew 18.0% and imports 7.4%. Low imports are the result of weakened domestic investment activity and domestic demand, as well as lower oil prices.

The main driver of Czech exports is traditionally Germany, where the surplus rose CZK12.9bn yoy. With the EU countries as a whole, the year-on-year improvement was CZK30bn. Overall, exports in December 2020 were 18.0% higher compared to December 2019, while imports were 7.4% higher. For the whole of 2020, domestic foreign trade showed a surplus of CZK190bn and was thus the highest in history. However, due to the coronavirus pandemic, dynamics in foreign trade declined last year. Exports were 4.5% lower overall, and imports fell 5.9%. At the beginning of the year, foreign trade could develop in a similar spirit as before; however, we expect a gradual increase in investment activity and growth in imports during the year, which should lead to a reduction in trade surpluses.

Construction continues declines significantly

Construction output fell 12.4% year on year in December, deepening again from the previous -8.4%. After seasonal adjustment, construction output decreased 2% mom. A significant slowdown is still evident in the area of building construction, where the year-on-year decline deepened to 16.5%. Building construction is not particularly in a good position due to the significant degree of uncertainty regarding further development, as many construction projects require a longer time to implement. Companies are not investing at this time, which is also reflected in lower demand for construction work. Meetings of construction companies with households are complicated by the continuing emphasis on social distancing. In addition, construction companies are still plagued by labour shortages when workers from abroad are lacking. On the other hand, in the last month of 2020, civil engineering experienced a partial recovery, which stagnated year-on-year after a previous decline of 1.3%. This was most likely related to higher government investment. Year-on-year growth in the number of new building permits slowed from 3.7% to 0.7% in December. However, their total value decreased 2.8%. For the whole of 2020, construction output fell 7.7%. For 2021, we expect a further decline of 4.2%.

The Czech koruna is currently being helped by growing speculation on rising interest rates, and the data from industry and foreign trade published today may support such expectations rather than the other way around. On the other hand, the data published today are not a significant surprise.

Regards,

Michal Brožka

Economic and Strategy Research

Komerční banka

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