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M. Singer – Recent Developments in the Czech Republic and Outlook 1M. Singer – Macroeconomic developments in the CR and GDP growth comparisons 1M. Singer – Macroeconomic developments, monetary policy and financial sector 1M. Singer – The Czech economy and crisis in Eurozone: CNB view 1M. Singer – Czech economy and development in Europe: Outlook and Challenges 1M. Singer – Czech Republic: Can record low rates be sustained? 1M. Singer – Czech Republic: Future challenges and opportunities 1M. Singer – Present Conditions, Monetary Policy and Outlook in Czech Republic 1M. Singer - Czech Republic: Staying Ahead of the Curve with Regard to Monetary Policy 1M. Singer: The economic and financial crisis from the point of view of the Czech banks 1M. Singer: Financial Crisis: Impacts on the CR and Lessons for the Supervisors 1M. Singer: Financial Crisis: Likely Impacts on the CR and Lessons for the SupervisorsM. Singer: Present Conditions, Monetary Policy and Outlook for CR 1M. Singer: Consumer protection in financial services: CNB approach 1

Recent Macroeconomic and Recent Macroeconomic and Monetary Developments in the Monetary Developments in the

Czech Republic and OutlookCzech Republic and Outlook

FORECASTING DINNER 2012, Czech CFA SocietyPrague, 22 February 2012

MiroslavMiroslav SingerSingerGovernor, Czech National BankGovernor, Czech National Bank

M. Singer – Recent Developments in the Czech Republic and Outlook 2

OverviewOverview

•

Recent macroeconomic and monetary developments

•

CNB forecast (February 2012)


GDPGDP (annual and quarterly percentage changes at constant

prices; seasonally adjusted data)

Source: CZSO

GDP fell by 0.3% q-o-q in 2011 Q4 (for the second time in a row) and the Czech economy went into a shallow recession; y-o-y growth slowed from 1.2% in 2011 Q3 to 0.5% in 2011 Q4

-6

-4

-2

0

2

4

6

8

I/07 I/08 I/09 I/10 I/11

q-o-q GDP grow th y-o-y GDP grow th

2011 Q4: preliminary


Output gapOutput gap (in per cent of potential output)

The output gap continued to open into negative values in 2011 Q3

-6-4-202468

I/04 I/05 I/06 I/07 I/08 I/09 I/10 I/11

Range of 3 estimates of production functionAverage of 3 estimates of production functionKalman filterHP filter Source: CNB


Structure of annual GDP growth Structure of annual GDP growth (contributions in percentage points; seasonally adjusted data)

Source: CZSO

Net exports were the sole contributor to real GDP growth in 2011 Q3

-8-6-4-202468

10

I/07 I/08 I/09 I/10 I/11

Household consumption Net exportsGross f ixed capital formation Government consumptionChange in inventories NPISH expenditure


Industrial production Industrial production ((yy--oo--yy in %)in %)

Source: CZSO

The seasonally adjusted rate of growth of industrial production slowed from 4.9% in November to 4.5% in December

-25

-20

-15

-10

-5

0

5

10

15

20

1/07 7 1/08 7 1/09 7 1/10 7 1/11 7

Industrial productionSeasonally adjustedHP trend


Barriers to growth in industry Barriers to growth in industry

Source: CZSOInsufficient demand is still the main barrier to growth in output in industry; its weight started rising recently

0

20

40

60

80

100

1/07 1/08 1/09 1/10 1/11

Insuff icient demand Labour shortagesMaterial and/or equip. short. Financial constraintsOther None


Retail sales Retail sales (percentages; constant prices)(percentages; constant prices)

Source: CZSOThe y-o-y rate of growth of retail sales has been oscillating above zero in recent months due to a prevailing low number of vacancies, persistently high unemployment and modest wage growth

-10

-5

0

5

10

15

20

1/07 7 1/08 7 1/09 7 1/10 7 1/11 7

Retail sales incl. carsSeasonally adjustedHP trend


State budget current performanceState budget current performance (in CZK (in CZK bnbn –– GFS 1986 methodology)GFS 1986 methodology)

The state budget recorded a lower deficit in 2011 than in 2010; in January 2012 the surplus was higher than in 2010 and 2011

-156,4

-96,7

-140,8

13,1

-91,5

-142,5-125,9

10,6

21,0

-200

-150

-100

-50

0

50

1 2 3 4 5 6 7 8 9 10 11 12

2010 2011 2012

Source: Ministry of Finance


Output gap and impact of fiscal Output gap and impact of fiscal discretion on GDP discretion on GDP (% of real GDP) (% of real GDP)

Fiscal policy was procyclical in 2002, 2004-2006, 2008 and 2010-2011

Note: Impacts of bottom-up discretion: P are impacts of revenue measures using IMF fiscal multipliers (Klyuev and Snudden, 2011); V1 and V2 are impacts of expenditure discretion using CNB multiplier of 0.6; V1 is deviation from trend of adjusted total expenditure; V2 is deviation from trend of ratio of adjusted total expenditure to GDP; TD is average impact of discretions identified by top-down method using multiplier of 0.6. Positive value indicates fiscal restriction, negative value fiscal expansion. Output gap: PF – using production function, KF – using Kalman filter.

-6

-4

-2

0

2

4

6

2001 2003 2005 2007 2009 2011

Av. discretion P – V1 and TD Av. discretion P – V2 and TDOutput gap PF Output gap KF Source: CNB


Trade balance Trade balance –– annual accumulationannual accumulation (in CZK (in CZK bnbn; national concept); national concept)

The cumulative trade surplus in 2011 was higher than in previous years

Source: CZSONote: National concept is based on change in ownership principle

0

10

20

30

40

50

60

70

80

90

100

110

120

1 2 3 4 5 6 7 8 9 10 11 12

bn C

ZK2007 2008 2009

2010 2011


CZK/EURCZK/EUR (3 Jan 2000 (3 Jan 2000 –– 14 Feb 2012)14 Feb 2012)

Source: Eurostat

Despite positive foreign trade, current account and government budget developments, and irrespective of the high degree of financial stability, the koruna has recently been deviating to the depreciation side of its long-run trend

22

24

26

28

30

32

34

36

38

2000

M01

D03

2000

M04

D24

2000

M08

D14

2000

M12

D04

2001

M03

D26

2001

M07

D16

2001

M11

D05

2002

M02

D25

2002

M06

D17

2002

M10

D07

2003

M01

D27

2003

M05

D19

2003

M09

D08

2003

M12

D29

2004

M04

D19

2004

M08

D09

2004

M11

D29

2005

M03

D21

2005

M07

D11

2005

M10

D31

2006

M02

D20

2006

M06

D13

2006

M10

D03

2007

M01

D24

2007

M05

D21

2007

M09

D10

2007

M12

D31

2008

M04

D22

2008

M08

D13

2008

M12

D03

2009

M03

D26

2009

M07

D17

2009

M11

D06

2010

M03

D01

2010

M06

D23

2010

M10

D13

2011

M02

D02

2011

M05

D27

2011

M09

D16

2012

M01

D06


InflationInflation (annual percentage changes)(annual percentage changes)

Source: CZSO

Annual CPI inflation jumped from 2.4% in December to 3.5% in January; 1.1 p.p. of the total inflation is due to the first-round effects of the tax change on administered and non-administered prices

-10

123

456

78

1/07 1/08 1/09 1/10 1/11 1/12

Monetary-policy relevant inflation Consumer price inf lation


Industrial producer pricesIndustrial producer prices (annual percentage changes; contributions in p.p.)(annual percentage changes; contributions in p.p.)

Source: CZSO

Industrial producer price inflation fell from 5.6% in October to 5.5% in November and 4.6% in December

-4

-2

0

2

4

6

8

1/10 3 5 7 9 11 1/11 3 5 7 9 11

Manufacture of coke and refined petroleum productsManufacture of basic metals and fabricated metal productsMining and quarrying and pow er generationManufacture of food, beverages and tobacco Other branches of manufacturing Total PPI (annual percentage changes)


Agriculture producer pricesAgriculture producer prices (annual percentage changes)(annual percentage changes)

Source: CZSO

Agricultural producer price inflation fell further in December

-50-40-30-20-10

0102030405060

1/07 1/08 1/09 1/10 1/11

Agricultural producer prices Crop product pricesLivestock product prices


Key CNB ratesKey CNB rates (in %)(in %)

Source: CNB

The CNB has left its key rates unchanged since May 2010

0

1

2

3

4

5

1/07 1/08 1/09 1/10 1/11 1/12

Lombard rate 2W repo rate Discount rate


Loans to corporations and householdsLoans to corporations and households (annual percentage changes)(annual percentage changes)

Growth in loans to the private sector remains subdued

-10

0

10

20

30

40

1/07 1/08 1/09 1/10 1/11

Loans, total Loans to non-financial corporationsLoans to households Source: CNB


Client and market interest rate spreadsClient and market interest rate spreads (percentage points)(percentage points)

Banks reduced slightly further the spreads between client and market rates on house purchase loans and on large corporate loans

0

1

2

3

4

5

1/07 1/08 1/09 1/10 1/11

Corporations (small loans – up to CZK 30m) 1Y – 3M PRIBORHouse purchase – 10Y government bondsHouse purchase 1Y – 3M PRIBORCorporations (large loans – over CZK 30m) 1Y – 3M PRIBOR

Source: CNB


Czech economy: main features Czech economy: main features 1/21/2

•

High openness sensitivity to external developments•

Persisting fundamental macroeconomic balances and emergence of only minor imbalances:

2011 H2: shallow recession

Output gap opening up •

Exchange rate of koruna:

Temporary interruption of (sustainable) appreciation trend

Exchange rate acted as buffer against shocks•

Inflation:

Very weak demand pressures

Cost shocks subsiding

Transient rise in inflation due to VAT hike in 2012


Czech economy: main features Czech economy: main features 2/22/2

•

Domestic fiscal policy:

Fiscal consolidation + low level of government debt mitigating risk of contagion from euro area

Was procyclical

in 2010-2011

Will have stagflation effects on economy in 2012 (lower domestic demand + higher inflation due to higher VAT)

•

Banking sector is in good shape: high capital adequacy ratio, profitability, resilience to shocks (in CNB stress tests)

The main drivers of the Czech economy are external developments and domestic fiscal policy


GDP in CZ, Germany and EUGDP in CZ, Germany and EU--27 27 (quarterly percentage changes at constant prices; seasonally

and working day adjusted data; 1998 Q1–2011 Q3)

Source: Eurostat

During the crisis the business cycle in the Czech Republic converged to that in Germany and the EU-27

-8

-6

-4

-2

0

2

4

6

8

10

1998

Q119

98Q3

1999

Q119

99Q3

2000

Q120

00Q3

2001

Q120

01Q3

2002

Q120

02Q3

2003

Q120

03Q3

2004

Q120

04Q3

2005

Q120

05Q3

2006

Q120

06Q3

2007

Q120

07Q3

2008

Q120

08Q3

2009

Q120

09Q3

2010

Q120

10Q3

2011

Q120

11Q3

y-o-

y ch

ange

in %

EU-27

Czech Republic

Germany


GDP in 2011 Q3 GDP in 2011 Q3 (index; GDP in 2008 Q3 = 100; seasonally and working (index; GDP in 2008 Q3 = 100; seasonally and working

day adjusted data)day adjusted data)

Source: Eurostat, own computation

In 2011 Q3, Czech GDP almost reached the pre-crisis level and is comparable with the EU-27 average

Note: Greece: 2011 Q1

110,1

104,6

102,4102,1101,4101,3101,2

100,499,5 99,4 99,3 98,9 98,8

97,7 97,3 97,1 97,0 97,096,3 96,3 96,0 95,7

93,5 93,1 92,4 92,1

90,189,3

80

85

90

95

100

105

110

115

Poland

Sweden

Austria

Slovakia

German

yMalt

aBelg

iumFranc

e UKEU-27

Netherl

ands

Cyprus CR Lu

xFinl

and

Spain

Portug

alIta

lyHun

garyDen

markBulg

aria

Roman

iaEsto

niaLit

huania

Irelan

dSlove

niaGree

ceLa

tvia

2008

Q3

= 10

0


CNB Forecast CNB Forecast (February 2012)


GDP forecastGDP forecast (annual percentage changes; seasonally adjusted)(annual percentage changes; seasonally adjusted)

Source: CNB

GDP will stagnate overall this year

-4

-2

0

2

4

6

8

10

I/10 II III IV I/11 II III IV I/12 II III IV I/13 II III

90% 70% 50% 30% confidence interval


Headline inflation forecastHeadline inflation forecast (annual percentage changes)(annual percentage changes)

Headline inflation will rise temporarily to just above 3% in 2012 owing to the VAT increase

-1

0

1

2

3

4

5

6

7



Inflation target

Monetary policyhorizon

Source: CNB


MonetaryMonetary--policy relevant inflation policy relevant inflation forecast forecast (annual percentage changes)(annual percentage changes)

Monetary-policy relevant inflation will be close to the target over the entire forecast horizon

-1

0

1

2

3

4

5

6

7



Inflation target

Monetary policyhorizon

Source: CNB


Interest rate forecastInterest rate forecast (3M PRIBOR in %)(3M PRIBOR in %)

Consistent with the forecast is stability of market interest rates in the near future and a modest decline thereafter

Source: CNB

0

1

2

3

4




Exchange rate forecast Exchange rate forecast (CZK/EUR)(CZK/EUR)

The nominal exchange rate will gradually appreciate from its currently weakened level

20

22

24

26

28


90% 70% 50% 30% confidence interval Source: CNB


•

External risks:

Escalation of debt crisis in euro area and risks of contagion

Abrupt negative shift in foreign demand (especially for Czech automotive output and export-intensive industries)

Gradual transfer of regulatory and supervisory powers to European level

•

Domestic risks:

Sudden depreciation of koruna

Worsening of budget balance

Risks aheadRisks ahead

Foreign risks clearly dominate


Thank youThank you

Miroslav

[email protected]: +421 224 412 000

Česká

národní

banka Na Příkopě

28

115 03 Praha

1

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