Industrial recovery, stable outlook
The outlook for the Czech economy remains subdued but ultimately stable. Czech industrial production lost further momentum in November and declined by 1.1% mom. The year-over-year fall is faster, reaching -3.2% for both the industry as a whole and the manufacturing sector. The main sectors weighing on industry are those that were hit most by the spike in global trade tensions in 2019. This is primarily the manufacture of basic metals (-12.3% yoy) and machinery (-7.2% yoy).
We remain cautiously optimistic for 2020 and expect the Czech manufacturing sector to recover slightly thanks to German bottoming from late 2019 and early 2020 lows. Our view has recently been supported by the stabilization of soft indicators. Both the industrial confidence indicator of the Czech Statistical Office and the Czech PMI recorded a minor improvement in December. Meanwhile, new foreign industrial orders have stabilized and the orders of the Czech automotive sector (a crucial part of the manufacturing industry) grew by more than 6% in November (figure CZ).
Still, one must keep in mind that conditions in the most heavily hit sectors, such as machinery and basic metals, may remain challenging for a prolonged period. That is at least what we can see in the new orders statistics. In the case of machinery, new orders continued to fall by more than 8% yoy and in the case of base metals, new orders fell by 15% yoy according to the most recent data.
Meanwhile, the November trade data also point to slower growth in Q4 2019. Both exports and imports were declining. Although during the most recent month the fall in exports was faster than imports, over the whole year it was rather the opposite. Since January 2019 cumulative exports are still higher than a year earlier, with a growth rate faster than that of imports. As a result, the cumulative trade balance has moderately improved in 2019 and reversed the negative trend from the previous year. As such, net exports are expected to have contributed positively to Czech growth throughout 2019.
The moderate improvement of the trade balance could have contributed to positive sentiment on the Czech FX market. However, one should not overestimate this positive impact. The main driver of the recent Czech koruna gains was rather favorable global sentiment. Furthermore, the improvement in the trade balance has been somewhat offset by growing dividend outflows.