Czech GDP growth accelerated above expectations to 2.9% y/y in the first quarter of 2017, according to a preliminary estimate published by statistics office CZSO on May 16.
The robust result is in line with growth data across the Visegrad region released the same day. Tightened labour markets are driving strong consumption, as was seen last year; however, strong activity in the Eurozone is stimulating exports and the signs are that public investment – which dragged on the regional economies in 2016 – is finally perking up thanks to increased absorption of EU funds.
Reflecting the latter assumption, analysts at J&T Bank point out that “the momentum of the Czech economy is becoming the same as at the turn of 2015 and 2016, i.e. about 3% growth”. The Visegrad states spent 2015 rushing to claim EU funds under the closing 2007-13 budget.
The statistical office only stated that the year-on-year growth was “especially” driven by exports and household consumption, but noted that all sectors grew through the first quarter. Detailed results showing the breakdown of activity will be published on June 2.
“Detailed breakdowns of the GDP data haven’t been published yet. However, monthly activity figures suggest that the pick-up was largely driven by a recovery in construction output following last year’s slump,” notes Liam Carson at Capital Economics of the regional data. “Moreover, industrial sectors appear to have strengthened on the back of an improvement in conditions in the euro-zone and it looks like growth in consumer-facing sectors remained robust.”
They concur at KBC. “We suspect that construction and investment activity related to stronger EU funds inflows might be behind stronger-than-expected growth figures,” they write.
Whatever the drivers, the headline result was well above estimates of around 2.3%. Seasonally adjusted, quarterly growth rose to 1.3%. Last year ended with a disappointment, with growth slowing to just 1.9% y/y in the fourth quarter.
In reaction to the result, the koruna firmed to 26.40 against the euro, a new high since the end of Czech National Bank ended its cap on the currency. The pace of growth in January-March could strengthen the instincts of rate setters that a rate hike is be due later this year.
The strong start to the year is not likely to fade, Carson forecasts. “Looking ahead, we expect growth in the region to remain strong over the course of this year as the drag from construction sectors continues to fade and as loose fiscal policy filters through,” he writes. “At the margin, today’s strong GDP figures may make central banks in the region more inclined to bring forward the start of monetary tightening cycles."