Investors in the week ahead will receive an update on the Czech Republic’s gauge of consumer and business confidence, following a bout of global growth-related weakness.
Wednesday, April 24
- Consumer Confidence – (Apr)
- Business Confidence – (Apr)
Sentiment in the Czech Republic has been sliding recently, with confidence in March having declined to its lowest level since mid-2017.
The Czech Statistical Office (CZSO) said consumer confidence in March had fallen by 1.8 points from the prior month to 104.6, reflecting fear among purchasers of a decrease in overall economic activity, as well as increased worries about their financial standing and concerns about an uptick in unemployment.
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Other indicators also decreased in March from the previous month, including confidence in industry (-1.5 to 91.9), trade (-0.3 to 94.0) and selected services (-0.9 to 97.9). It seems the only gauge that picked-up was construction (+1.5 to 107.9).
The composite confidence indicator (economic sentiment indicator) fell 1.2 points month-over-month in March to 97.0.
Jakub Seidler, ING’s chief economist for the Czech Republic, noted that the country’s domestic confidence “largely followed developments abroad in March and confirms that the situation abroad remains challenging.”
He continued that a “further decline in Germany's Manufacturing PMI this month does not bode well for the Czech industry," and uncertainty surrounding Brexit and the “escalation of trade wars is beginning to have clearer negative consequences for economic activity.”
In fact, the Czech Republic’s manufacturing sector had been hit hard in the first quarter of 2019, having been clobbered by contractions in output and new orders.
IHS Markit economist Siân Jones recently noted that operating conditions in the country deteriorated at the fastest rate in over six years, marked by “the quickest fall in new export orders since June 2009.”
Jones added that consistent with the recently conducted IHS Markit Czech Business Outlook survey, “goods producers expressed the weakest degree of confidence since late-2012, with firms highlighting concerns surrounding more subdued underlying demand and difficulties finding qualified staff."
Rate indecision
The Czech National Bank (CZNB) decided at its latest monetary policy meeting in late March to keep its two-week repo rate, discount rate and Lombard rate unchanged at 1.75%, 0.75%, and 2.75%, respectively. However, two of the bank’s seven-member Board had voted for hiking rates by 25 basis points, in line with the several increases it had executed in 2018.
The CZNB partly attributed its most recent decision to leave its key interest rates at their current levels to “growing concerns of a cyclical slowdown” of the European and global economy, primarily with respect to the country’s major trading partners – notably Germany and Slovakia. The bank said it has “seen substantial corrections” in the lowering of growth estimates in those nations compared to smaller changes for more remote countries, such as France, Spain, and Italy.
The move is somewhat of a pivot from the central bank’s tightening of monetary policy, which had culminated in five rate hikes since February 2018.
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The bank said that the “essential thing is that we have shifted from zero to a level near 2%,” and although it may again “gladly vote for interest rate stability,” the CZNB continued that it may also “need to raise rates slightly.”
The central bank added that for the time being, “it certainly doesn’t look like we’ll be considering cutting interest rates.”
At just south of 3%, the pace of economic growth in the Czech Republic came in faster than expected in the fourth quarter of 2018, underscored by an upswing in goods and services exports, as well as government consumption, but further advancement has been generally pressured by lower household spending and slower industrial production.
Overall, while the country’s GDP and prices have been rising at a faster pace than the CZNB had anticipated, wages have been increasing more slowly.
Currency and credit quality
Against this backdrop, the Czech Koruna has undergone a steady level of depreciation against the U.S. dollar, which some market participants think could lead to an additional increase in interest rates if certain global headwinds, including slowing European and German growth, trade, as well as Brexit uncertainties, subside.
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Moreover, Moody’s Investors Service analysts Steffen Dyck and Yves Lemay pointed out that the Czech Republic's general government debt burden is “low and declining,” having reached 32.7% of GDP as of 2018, below the median for similar ‘A1,’ investment-grade rated peers.
According to Moody’s, the nation’s credit strengths have been underpinned by general government fiscal surpluses since 2016, which the agency expects to remain at about 0.7% of GDP on average in 2019 and 2020.
However, Dyck added that in the near-term, “a combination of tight labor market conditions and strong wage increases could weigh on cost competitiveness" in the country, while longer-term structural challenges “remain a constraint on credit quality."
To date, uncertainties over the direction of the Czech Republic’s economy appear to have spurred a touch of uneasiness among investors about the country’s creditworthiness.
Five-year credit default swap spreads (CDS), for example, have widened around 4bps over the past three months to just south of 49bps, while Estonia and Slovakia, rated ‘A1’ and ‘A2’ by Moody’s, respectively, have narrowed 1.5bps and 0.5bps over the same timeframe to 62.1bps and 47.75bps, respectively.
Investors will likely be eyeing the confidence levels in the Czech Republic, as well as economic conditions in Germany, Slovakia and other key trading partners, for further signs of weakness in the country’s overall health.
In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of the U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.
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