Czech economic confidence indicator at six-month high

Overall economic sentiment in the Czech Republic improved in October to its highest level in six months. The composite confidence indicator, as calculated by the Czech Statistics Office, rose to 102.2 in October from 99.4 in September. The statistics office said that economic sentiment in October was driven largely by industry. However, consumer confidence fell, as more consumers predicted a worsening of their own financial and overall economic situation in the next 12 months. I spoke to economic analyst Vladimir Pikora from the Prague branch of Volksbank about the main reasons behind the growing consumer pessimism.

"One of the reasons is that ordinary people are afraid of an increase in prices due to a tax hike. This expectation is very logical, but we think that the impact of higher taxes is often overestimated. We predict inflation to increase but to remain within the central bank's inflation target range, therefore we do not need to worry. We do not consider the average inflation rate of around 2.5 percent to be high or even dangerous. Nevertheless, it is clear that this increase in inflation will substantially contribute to a slowdown of real wage growth which was very robust in past quarters. We have to be therefore ready for a slowdown in household consumption. In this light, it is slightly surprising that retailers are still optimistic.

Many people responded that they plan to save less money. This seems to be logical as well. The interest rates reached their historical low and will probably not increase in the near future. On the other hand, things will become more expensive with the higher inflation rate. That is why we expect people to continue borrowing money. This could help to extraordinarily high sales before Christmas. However, more credit could be treacherous for many families as they neglect the danger of losing a job. The survey showed that people are afraid of unemployment less than in the past. We think this is wrong as we expect the unemployment rate a record high level of almost eleven percent in January 2004."

You said people are likely to save less, to borrow more money... Do you think they will invest their savings now with the expectation of higher inflation?

"Many people responded they would like to invest in housing and cars. However, we are afraid that it is not a very good time to invest in housing, because real estates are very expensive right now. We think there is a big chance that prices of real states could slightly decrease after the Czech Republic's EU accession. Many people expected that after the EU enlargement, these assets will be more expensive and started to buy. We are afraid that there is a bubble on the market right now and investing in this area is therefore not reasonable. The same applies to cars, because from an economic point of view, investing in a car is not very smart because it depreciates with time, so I would recommend investing in something else."

How would you explain the discrepancy between the business and consumer confidence?

"Positive sentiment is seen in all segments of business. However, the best sentiment is observed in trade, followed by heavy and light industry. The lowest figure was recorded in construction. 77 percent of industrial companies consider their situation to be good and only four percent consider the current situation to be bad. This is a better result than in September. Companies expect an increase in employment and production growth. The confidence indicator in industry increased due to these positive expectations. Similar situation was in trade. 40 percent of trading companies expect an improvement of their business. Construction companies do not expect any change in domestic and foreign demand. That is why the overall confidence indicator in construction did not change. From that we can see that the reason was that many companies expect a stronger demand home as well as abroad. I would say the main factor behind the confidence is the expected economic recovery in Germany which will also be reflected here in the Czech Republic. This causes the positive mood, the positive sentiment, and people expect that their business will improve over the next sixth months."