Page 8 - bne IntelliNews monthly magazine December 2023

8 I Companies & Markets bne December 2023
double-digit real earnings falls, restrictive monetary policy, lukewarm fiscal support, and the eurozone-wide industrial downturn. These adverse factors, coupled with incoming fiscal consolidation, will continue to dampen growth in the coming quarters, says Farr.
The supply shocks that have hit the EU countries over the last three years reverberated particularly strongly in the Czech economy. The shortage of microchips and severe supply disruptions during the pandemic hit the country's large manufacturing sector hard, particularly automotive production.
In general, manufacturing output is currently only 5.6% above the pre-pandemic level and well short of the pre-pandemic trend. The still high interest rates continues to weigh on manufacturing and Oxford Economics expects that industrial production will decline by another 2.7% in the second half of this year as a result.
But falling inflation will gradually take the pressure off as real incomes resume growth and the Czech National Bank (CNB) starts to normalise its restrictive policy. But government's spending cuts will dampen growth in 2024 and with Germany, Czech Republic's key export market, also struggling, the near- term outlook for manufacturing and exports is also dim.
“Policy support is needed to address fledgling growth, easing inflation, and a risk of lasting damage to the demand and supply sides. But this is unlikely to be heeded as the centre- right governing coalition's focus is on balancing the budget. The CNB might need to loosen policy quicker, particularly as inflation falls below target, but this won't shore up growth immediately,” Dvorak says.
All central banks in Europe have gone through substantial hiking cycles in order to tame inflation. However, the CNB
was an early mover in June 2021 and its policy tightening was unusually front-loaded. Now, some analysts expect the CNB to start monetary easing at the next monetary policy meeting in December in an effort to give the economy a shot in the arm, perhaps with a cut in its policy rate of 25bp, from 7% to 6.75%.
Czech monetary policy rate vs CPI inflation y/y
Falling inflation in CE
In general, Central Europe has experienced significant drops in inflation this year, providing central banks with increased flexibility in their monetary policies as they start to switch from fighting inflation to supporting growth.
Hungary's central bank implemented a rate cut of 75 basis points in the first half of November, surpassing market expec- tations, after inflation fell to 12.2% in September – the highest rate amongst the Visegrad countries. However, Hungary
still grapples with inflationary pressures, with the current inflation rate of 12.2% y/y on average – well above the central bank’s target range. Recent data released this week also shows that wage growth in August continued to soar, registering at over 15% y/y.
And after running record inflation rates of almost 20% in the last year, Polish consumer price inflation (CPI) has been falling consistently to reach 6.5% in October. Likewise, Slovak inflation has fallen to 8.2% in September and Czech inflation to 6.9%.
Hungary inflation y/y
Source: Central bank of Hungary
Poland CPI, y/y change
Source: Central bank of Poland
Slovak inflation y/y
Source: Central bank of Czechia
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Source: Central bank of Slovak