By Leos Rousek (Dow Jones 23.5.2011)
- Czech economic growth remains export-driven
- Low domestic demand, firming koruna hold down inflation
- Higher-than-expected 1Q German GDP growth may not be enough to stoke sufficient Czech growth in 2011
- Czech central bank to begin releasing chart on risks to its inflation forecast
Czech exporters will be the sole drivers of economic growth in 2011 while consumers remain cash-strapped and government expenditures are curtailed, the head of the Czech National Bank's monetary and statistics department said Monday.
The situation bodes well for inflation pressures remaining tame despite signs of a solid recovery in Germany, Tomas Holub told Dow Jones Newswires in an interview in his office overlooking the art-nouveau Municipal House.
"Only a part of the Czech economy can benefit from the German growth and the rest of it remains in doldrums," Holub said
Germany's unexpectedly strong first-quarter growth of 1.5% on the quarter may not provide enough fuel for the export-oriented Czech economy in 2011, he said.
"We still have a two-speed economy for now," said Holub, who is also the CNB chief economist and forecaster.
Holub and his team of economists draft quarterly updates on growth and inflation forecasts in addition to four interim papers, known as mini situational reports. All eight documents serve as guidance to seven CNB policy makers to decide on interest rate levels at their eight rate-setting meetings convened during each calendar year.
Holub isn't a rate setter but his office and expertise carry significant weight in the policy-making process.
While Czech exporters are likely to benefit from the rebounding German growth, uncertainties over the Czech recovery remain, making it difficult to predict how long it will take before there is a change to the record-low Czech interest rates, symbolized by the headline two-week repo rate.
"It's still too early to say but any export-driven growth may not necessarily mean a stricter monetary policy," Holub said, adding that exports can drive up the value of the koruna, which in turn tames imported inflationary pressures.
In his latest inflation and growth forecast, Holub estimates consumer prices will rise 2.2% on the year by mid-2012 and ease to 2.1% in the third quarter next year, up from an earlier forecast of 2.1%.
Holub's team also lowered the forecast for gross domestic product for 2011 to 1.5% on the year, compared with 1.6% in its February prognosis. It lowered the 2012 growth forecast to 2.8% on the year from an earlier forecast of 3%.
Based on these consumer inflation and growth outlooks, the forecast also concludes that the CNB may delay any monetary policy tightening until as early as October.
"Wages are growing very slowly, and fiscal policy is restrictive, translating into a low domestic demand, so we still think that the growth should still slow down this year," Holub said.
Fueled by higher growth the Czech koruna may return to its real-appreciation path of between 2% and 3% a year from 2012, having largely stagnated this year.
"This is, of course, a lower strengthening rate than 3%-4% that we used to record in the previous 10 to 15 years," Holub said.
Starting in July, CNB watchers may get a more detailed glimpse of what the upcoming inflation and growth forecasts will contain.
The minutes from the June 23 CNB rate-setting meeting, due to be released July 1, will include a chart showing what the monetary policy board sees as the risks to its inflation forecast. The document, known as Graph of Risks to the Inflation Projection, or GRIP, has so far been drafted but not published four times a year.
"This chart can serve as a tool or a leading indicator of which way the new upcoming forecast could move, even though one shouldn't read it in a mechanical way," Holub said.