Business and consumer sentiment in the current phase of the economic cycle according to CZSO and CNB indicators

In the current phase of the business cycle, characterised by a gradual recovery of the Czech economy from a deep recession, information from the business and household sectors on how they perceive their current economic situation and particularly on what their expectations are regarding its future development is growing in importance. This box sets out to determine, on the basis of indicators derived from a confidence survey, whether agents in the main sectors of the economy are expecting economic activity to recover in the near future. Another aim is to determine how the household sector, which is currently facing rising unemployment and falling income, views its future economic situation.

Business and consumer sentiment was measured using the results of the business sector confidence survey conducted by the CZSO and the CNB and by the results of the CZSO consumer confidence survey. In the interests of comparability of the results of these two surveys in the business sector, we assessed the similar indicators “economic situation” (CZSO) and “general business situation” (CNB), for which business expectations are identically determined for three months ahead.

In the first step we focused on the accuracy of the estimate of when the crisis started and when it reached its bottom. This provided us with information on the accuracy of businesses’ estimates at various time horizons. All sectors were hit hard by the financial and economic crisis, but the paths of their expectations compared with actual developments indicated that their ability to estimate future trends particularly in demand and consequently in their economic situation varied across sectors. Our analysis revealed that the onset of the crisis was reflected first of all in expectations in industry. This is shown by Chart 1, which illustrates expectations regarding the economic situation expressed by businesses in the outlook for three and six months ahead along with the actual evolution of industrial production. The expectations for the next three months were more or less fulfilled, while those for the next six months were less accurate. The results of the latest CNB survey (see Chart 2) show that expectations in the manufacturing sector were hit hard in late 2008 and early 2009.

Chart 1 (Box) Expectations in industry

Chart 2 (Box)  CNB survey

The confidence and production indicators were relatively volatile in construction compared to industry (see Chart 3). Although a sizeable fall in construction output was not recorded until the start of 2010, pessimism was visible in the expectations well in advance. The results of the survey conducted by the CNB in construction provide the same evidence. By contrast, greater optimism was apparent in retail trade, even though sales were already weakening (see Chart 4). The situation in services was similar (see Chart 5). The optimistic expectations in services persisted for longer than was consistent with the actual economic situation. Households responded to the sharp change in the economic situation with a sharp deterioration in their expectations regarding unemployment and the overall economic situation in the next twelve months (see Chart 6).

Chart 3 (Box) Expectations in construction

Chart 4 (Box) Expectations in retail trade

Chart 5 (Box) Expectations in services

Chart 6 (Box) Consumers' expectations

Overall, all sectors have reached the bottom of economic agents’ sentiment, albeit in different quarters of 2009. Expectations regarding the economic situation for the next three or six months in all sectors are showing increasing positive expectations regarding the future economic situation. In industry, which was hit hardest by the crisis, businesses most accurately estimated the reaching of the bottom and the onset of the economic recovery three months ahead. According to the March survey, these positive expectations are continue to rise, indicating a continuing recovery in industrial production in 2010 Q2 and Q3. Other sub-indicators of the aggregate CZSO business confidence indicator – particularly expected domestic and external demand and the outlook for production activity – are heading in the same direction. An improving outlook is also being indicated by the results of the CNB survey of the general business situation of manufacturing businesses, according to which the expectations for 2010 Q2 were in the band where positive answers prevail.

In construction too, where the current economic situation is deteriorating owing to falling production, the CZSO survey indicates an improvement in the outlook for the remainder of 2010. However, the results of the CNB survey are still not indicating any such change. According to the CZSO survey, the economic outlook for this year is also improving in trade and services. Only in the household sector, whose expectations have also increased since mid-2009, is the economic outlook – unlike in trade – generally flat at the beginning of this year, owing to persisting high unemployment.

Overall, the survey indicators in the sectors of non-financial businesses and households indicate that economic agents expect the gradual recovery of the Czech economy to continue during 2010.