Industrial performance surprised on the upside in June, confirming that Czech manufacturing may be out of the woods, even if a full recovery remains some way off. Strong new orders look promising but may have been distorted by Hormuz-related pre-stocking. Wage growth picked up in June, but quarterly averages suggest a slowdown
Full rebound awaited
Czech real industrial production grew by 4.0% year-on-year in June and rose 1.2% from the previous month, coming in stronger than expected. The nominal value of new orders was up 13.1% YoY, with new orders from abroad gaining 19.5% YoY and domestic new orders up by 2.2% YoY. June’s employment in industry was 1.1% weaker than in the previous year, while average annual wage growth increased to 7.9% in June from 3.7% previously. Construction output increased by 2.0% YoY in June yet shed 0.3% month-on-month. The average number of employees in construction increased by 2.1% YoY and the average wage growth quickened to 7.2% YoY in June from 3.9% previously. The trade balance surplus widened in June, supported mostly by the motor vehicles segment.
Total industrial production driven by electricity output
June’s annual growth in industrial production was also driven by base effects, reflecting relatively low electricity production last year. When zooming in on manufacturing itself, it expanded by 2.6% from the previous year. This is progress when compared to the bleak years of 2023-24 when real manufacturing output was not growing at all on average, but it is still far away from the full expansion of above 5% on average between 2014 and 2018. It remains to be seen how fast Czech industry can recover to a full-throttle performance though we believe this is unlikely to happen before 2027, with current conflicts hampering a smooth recovery. Still, the strength of new orders is very promising, although this may partly reflect pre-stocking driven by the Hormuz shock.
New orders rock but pre-stocking may be the story behind it
Czech industry and the Czech economy overall show a rather decent level of resilience in the face of the global negative supply shock. This is an important piece of information entering the Czech National Bank's reaction function today. The rebound in June’s wages in both industry and construction will be of particular interest. Nevertheless, when looking at quarterly averages of monthly wage data, the annual wage growth slowed to 5.8% in the second quarter from 6.1% in the first. The annual gain in real wages softened to 3.7% in the second quarter from 4.3% in the first, according to averages of monthly observations. With the unemployment rate on a gradual upward trend, we don’t assess the labour market as red-hot right now. With this in mind, we see a lot of hawkish talk and caution referring to wage and credit dynamics, while rates will likely stay unchanged at 3.75%.
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