At the beginning of the year, industrial production in the Czech Republic decreased 0.4% mom (SWDA). In year-on-year terms, after December's year-on-year growth of 8.0% in January, industry fell 4.4%, which was practically in line with our estimate and market expectations.

In terms of structure, in January industry was driven by the production of chemicals, metal products and metal structures, and the production of electrical equipment. It was pulled down by the food industry, car production, and the repair and installation of machinery and equipment. The value of new orders fell 4.6% year on year after a previous increase of 9.2%; foreign orders still grew 5.5%, while domestic orders fell sharply by 23.9%.

This January had a calendar disadvantage in the form of two missing working days, with the statistical office stating that after adjusting for this effect industrial production grew 0.9% in January. The question is whether the first two days of the month have such a strong significance in the form of a 5.3 percentage point difference compared to unadjusted data. However, this is not a big surprise. Data for January confirm that industrial production is rather weaker at the beginning of the year, which is not bad news given some warning reports about the number of missing subcontractors. However, revisions of previous data also show considerable uncertainty about the published data. The December result of industrial production was revised in the case of data adjusted for calendar effects from -12.4% yoy to -11.4% yoy and in the case of unadjusted even from 5.8% yoy to 8.0% yoy.

In the first quarter, industry is hampered by slow deliveries of components as well as complications for the work force due to the pandemic situation, which also restricts foreign trade. Brexit is also likely to have a negative effect, due to which there was a pre-supply of local customers. For the first quarter, we expect a quarter-on-quarter decline in industrial production of 0.3%.

After last year's decline in industrial production of 8%, our forecast for this year assumes growth of 9.8%. This looks like rocket growth; however, the main recovery has already taken place and this year's growth is high due to a low base effect. Even if there had been no change in industrial production since December, full-year industrial growth would have been 7.5%. However, the outlook remains highly uncertain. The sword of Damocles still hangs over the industry in the form of closures in the event of a worsening pandemic situation, although developments in recent weeks offer some hope for improvement.

The construction industry is also suffering from infection

The construction industry grew 4.2% mom in January; however, output is still low. Compared to last January, when we still had about two months left until the beginning of the pandemic, construction output was 5.2% lower. Continued pandemic restrictions affecting lower investment activity, especially in the private sector, and worse January weather are the main factors affecting the performance of Czech builders at the beginning of this year. The first reason is of a longer-term nature, when the economic recession caused by the pandemic limits investment activity, especially that which has an impact on construction production, i.e. the building of new production capacities. Building construction was worse off 6.5% yoy. On the contrary, the production of civil engineering was 0.1% higher. The investment activity of the state can be seen here in the light of last year's record investment expenditures.

The continuing unfavourable pandemic situation, as well as forward-looking statistics, do not give us much optimism. Compared to last January, the authorities issued 12.3% fewer building permits this year; the approximate value of these permits was 8.3% lower. Looking at housing construction statistics, at first glance they may please with 11.5% more dwellings completed year-on-year. Much worse, however, is the news that 11.3% fewer new dwellings were started year-on-year. This does not give much hope for improving the situation in the housing market in the future.

After the release of the data, the Czech koruna weakened only slightly to 26.22 CZK / EUR. The limit of its strengthening is still the domestic pandemic situation, where rather than improvement, we can talk more about stabilisation.

Regards,

Michal Brožka

Economic and Strategy Research

Komerční banka

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