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Inflation accelerates alongside expectations of further
interest rate hikes by central bank
Stockpiling efforts and greater global demand push input costs
up at significant pace
Demand conditions remain strong, but concerns around automotive
supply chains persist
The Czech manufacturing sector has seen a marked expansion in
output in recent months, as demand continued to recover from a
tumultuous year amid the COVID-19 pandemic. Notably, PMI data for
June signalled the fastest upturn in production since February 2018
as economies reopened and new order growth quickened. That said,
output was reportedly hampered by severe input shortages in July,
which have threatened to impede production capacities throughout
2021, and challenges sourcing key components in the automotive
industry have resulted in shutdowns at some large producers.
In fact, vendor performance deteriorated to the greatest extent
on record in July, with delivery times lengthening to a more marked
degree than was seen during the initial pandemic lockdowns in 2020.
The resulting upward pressure on prices has led the Czech National
Bank to raise interest rates once again in August, with
expectations of further hikes through the rest of 2021.
Supply shortages exacerbate cost pressures
Input costs faced by Czech manufacturers increased at the
quickest pace since data collection began in June 2001 in July. In
fact, the rate of cost inflation was the fastest of all PMI surveys
across their respective histories. Alongside stronger global demand
for inputs as economies reopen, firms stated that supplier stock
levels had worsened at the start of the third quarter.
Material shortages, transportation issues and the ongoing
COVID-19 pandemic exacerbated inflationary pressures. In July, some
companies noted
that their vendors were no longer able to take orders as
shortages became more widespread.
Nevertheless, firms remained keen to get their hands on inputs,
partly due to efforts to build stocks to ensure future production
capacity. The rise in purchasing activity was among the fastest for
around three-and-a-half years, as stocks of inputs were accumulated
at the sharpest pace for just under 14 years.
Uncertainty over future demand amid automotive
shutdowns
A point of concern was found in the anecdotal evidence received
from Czech manufacturing PMI panellists. Although stock building
continued at a marked pace, some firms reported shutdowns at
automotive customers, and some drop-off in demand from German
clients. Germany accounts for a large proportion of total good
exports from the Czech goods-producing industry, at around 30%. As
a result, changes in demand from German customers can have a strong
impact on the Czech manufacturing sector.
Uncertainty regarding demand over the coming months and
shutdowns in the automotive sector amid substantial material
shortages, weighed on output expectations across the Czech
goods-producing sector in July, which slipped to a five-month
low.
Further hikes in interest rates expected
Although the rate of consumer price inflation (CPI) eased to
2.8% in June, down again from 3.1% in April, the speed of price
increases and severity of inflationary pressures was enough to
drive the Czech National Bank's (CNB) monetary policy committee to
hike interest rates in both their June and August meetings. The
target rate is 2%, with current forecasts anticipating that the
pace of inflation will remain above this benchmark well into
2022.
As a result, the governor of the CNB has stated that he is
willing to raise interest rates further in 2021 and early 2022 to
bring inflation back down to target. Our current forecast expects
interest rates to rise to 1.75% by the end of 2022.
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
