CONFERENCE CALL: Moody’s Central Europe summit highlights Czech economy's strengths

CONFERENCE CALL: Moody’s Central Europe summit highlights Czech economy's strengths
Clouds gather: conference in Prague highlighted some of the medium-term risks to Czechia's currently positive outlook.
By Jaroslav Hroch in Prague April 13, 2018

Panellists at the recent 12th Annual Central Europe Summit organised by Moody’s rating agency in Prague were mostly bullish on the regional economy, and largely full of praise for Czechia when taking stock of key events since the central bank began currency interventions. 

But chronic labour shortages and ageing populations – a general problem throughout the region – as well as the housing bubble in Czechia and external factors, such as the spectre of Brexit and robotisation, coupled with productivity concerns, spurred calls at the day-long April 10 event for prudent action.

The first panel was devoted to the Czech economy, which began with a presentation by central bank governor Jiri Rusnok, in which he summed up Czech National Bank (CNB) monetary policy and the future economic outlook, focusing chiefly on the labour and housing markets. 

Rusnok noted that the CNB was first to normalise monetary policy and that the koruna had strengthened from 27 koruna against the euro to 25. He also said the next interest rates hike will occur in the fourth quarter of 2018. According to his forecast, the chances for this are pretty high.

He also confirmed that GDP growth should exceed 3% in the coming years. “The growth is driven mainly by the domestic consumption, which is good and stable from my point of view,” Rusnok stated, adding that core inflation should be close to the target of 2%.

Moody’s representatives praised the CNB for ending the currency intervention regime without any serious shock to the market in contrast to the Swiss case, where the franc experienced a significant drop.

The rating agency also noted that Czech banks are the strongest in the CEE region, praising them apart from some aspects of their mortgage policy, especially loan-to-value (LTV) limits.

Negative medium-term risks

On the downside, Rusnok repeated previous concerns that the labour and property markets are overheating and Czech growth is close to its peak. “There is an extraordinary tightening of the labour market, which is above the peak of 2008 and the unemployment rate is breaking one record after another,” Rusnok said.

“We couldn’t foresee it 10 years ago. I wouldn’t say that we will be on the level of Scandinavia.”

In an interview on the margins of the conference, Komercni Banka senior economist Viktor Zeisel warned of other possible risks and negatives, such as low productivity, but said the dangers posed by robotization and automatisation could, in fact, turn out to be pluses.

“Negatives are definitely here, but I wouldn’t include robotisation and automatisation among them. These are positive risks. If successfully introduced, it will improve productivity significantly. And productivity is an important problem not only the Czech economy but for others in the region. They are not able to fully catch up to the Western countries,” Zeisel told bne IntelliNews.

The labour shortage can, for this reason, also be seen as a positive.

“Maybe one of the benefits of the acute labour shortage in Czechia as the first country in the EU is that it is really an incentive for entrepreneurs to invest into robotisation,” Zeisel added. “It [the labour shortage] will be an obstacle, but I wouldn’t call it a problem. It can be solved out through robotisation.” 

Corruption remains a problem for Czechia

On the other hand, Heiko Peters, a Moody’s assistant vice president and analyst in its Sovereign Risk Group, cited the labour market as a medium-term risk for the Czech, Polish, Bulgarian and Hungarian economies – and a big one.

In the Czech case, over 40% of companies in the industry and 15% in services cited labour shortages as a limiting factor. Moreover, low productivity and an ageing population are also negatives. Migration can help to mitigate the problem, but cannot solve it, Peters said.

“Some companies will be leaving because wouldn’t be able to meet the demand or to increase wages for the employees. It is maybe arrogant but let them go if they cannot increase the added value,” he said.

The labour shortage is not only putting pressure on wages, it is changing the work as such. For example, employers are increasingly compelled to give big concessions to employees, such as flexible or part-time arrangements, the option to work from home, and so on, Zeisel noted.

Moreover, rising wages are most beneficial for the lowest-paid workers. “However, a problem in some areas is that despite low unemployment, people won’t commute for work. The problem is infrastructure,” Zeisel said, noting structural challenges.

As for robotisation and automatisation of the economy, the Czech educational system appears unready for such challenges. Instead of calling for technical education, it is most important to focus on fast-learning and multidisciplinary problem-solving, as is being done in the UK, he added.

That said, the biggest problem for Czechia lies in the institutional base, according to Moody’s, in terms of reining in corruption. In other indicators, Czechia has good results and is even the highest-ranking among CEE countries, Peters said.

Brexit, real estate bubbles and other external threats

Rusnok also said that the Czech property market is overheating due to the availability of low-interest mortgages and a shortage of flats or properties. This led to a sharp increase in prices, but the feared bubble should be receding, according to Czech analysts.

Zeisel added during a discussion that the main problems are external, such as Brexit, which could hit the car industry except for Skoda Auto, the country’ largest employer and lead exporter. He noted that the financial market is overflooded with korunas, which could have a negative consequence if investors start leaving Czechia.

Although Rusnok didn’t want to give a definitive answer in response to a question from the audience on prospective accession to the EU monetary union, he predicted that Czechia would not join the eurozone before 2025, a view shared by Zeisel.

“I am glad that Czechia has its own currency still. Otherwise, it could be a pretty boring discussion,” moderator Dietmar Hornung of Moody’s joked.