Czech economic highlights of a probably overheated 2017

A booming economy on the back of higher wages, more people in jobs, and strong exports – fuelled largely by the auto sector - and hardly dimmed by the end of the low crown and resurrection of interest rates as a central bank weapon. That was the big economic picture of the Czech economy in 2017 with the foot on the pedal likely to be lifted just slightly over the coming 12 months.

End of low crown without soar away currency

Photo: Matěj Skalický

The macroeconomic event of 2017 came on April 6. It was hardly a bolt from the blue but was perhaps a bit earlier than some had been expecting - the Czech National Bank announced that it was effectively ending its low crown policy that had been in place for the last three-and-a-half years. During that period the bank had pledged to prevent the crown strengthening beyond 27 crowns to the euro. The move was a bid to head off deflation and recognition of the fact that after successive interest rate cuts bringing rates to near zero, other tools needed to be used.

Switzerland had undertaken a similar move of ending its cap in 2015, a surprise step which resulted in the Swiss franc immediately soaring and damaging many exporters. The Czech central bank said it had learnt that lesson and warned that it could continue with ad hoc interventions if the crown strengthened too much. The crown did appreciate against the euro immediately and over the long term, but not that dramatically. At its peak, the crown rose to around 25.4 crowns/euro but for much of the last eight months has been hovering just above 26 crowns/euro.

With foreign exchange interventions largely discarded, the central bank has started using interest rates again to pump prime the booming Czech economy. Two interest rate rises have taken place, both of 0.25 percentage points, starting in August and continuing in November. The benchmark interest rate is now 0.5 percent but further rate hikes are expected in 2018.

Wages rise as unemployment plummets and vacancies go begging

Photo: UNDP in Europe and Central Asia via Foter.com / CC BY-NC-SA

There’s a basic economic theory that unemployment rises alongside wage increases and vice versa. The flaws in the so-called Phillips curve, named after the professor at the London School of Economics (LSE) who first outlined the theory, have long been known. If they weren’t the Czech Republic would have blown a massive hole in the construction during the last year.

Czech unemployment has dropped to the lowest rate in Europe, at the end of November it had fallen to 3.5 percent of those actively seeking work. And while the numbers of jobless fell to just over 265,000 the number of vacancies have soared to almost equal them, at around 214,000. In some Czech regions, the unemployment rate stands at just over 1.0 percent and many Czech firms say they simply can’t fill the vacancies they have and have joined the clamour for more foreign workers to be allowed in.

Czech trades unions point out that one reason many of the vacancies aren’t filled is that the wages offered are simply too low. But in 2017, Czech wages did, for many, start to take off after previous years of restraint. In the first nine months of the year average wages rose by 6.6 percent. Taking away the impact of inflation, at 2.4 percent over the period, and the real rate of wage growth came in at 4.1 percent. The extra money many people had in their pockets helped fuel an economic boom which rose to 5.0 percent in the third quarter and which is expected to come in at 4.5 percent for the whole of the year, according to the Czech National Bank (CNB).

And while Czech media highlighted the stronger than expected 5.0 percent growth, the domestic figures are not the highest in Europe. Romanian year-on-year growth over the same period was 8.6 percent, Latvia saw its economy advance by 6.2 percent and Poland posted a figure of 5.2 percent. Near neighbour Slovakia came in at 4.9 percent. Czech growth, stoked by exports and domestic spending and slightly trimmed by less EU funds in the immediate pipeline, is expected to fall off slightly in 2018.

Škoda Auto breaks records but faces growth pains

Photo: CC BY-SA 3.0

Low crown or not, Czech cars are being produced and sold in record numbers. And 2017 looks like being another record year for the biggest car maker and exporter, Škoda Auto. It’s not a shared success story, fellow Czech manufacturer Hyundai has seen production stable in 2017 and the figures are down for the TPCA joint venture.

From January to November, Škoda raised production to just under 796,000 vehicles, an increase of 12.7 percent on the first 11 months of 2016. And the car maker is hard pressed to meet the demands of a buoyant market at home and abroad. November alone was the best month for sales ever with 114,600 cars sold, up 17.5 percent on the same month a year earlier. And this month Škoda Auto declared it had exceeded sales of 100,000 cars for the first time on the Czech market during a single year.

Foreign sales are also booming, Chinese sales of the producer’s models hit a new monthly record of 37,000 in November, up 23.4 percent on a year earlier. But the success is coming at a cost. Škoda Auto this month announced it had to ship in cars from assembly plants in Russia to meet demand in other parts of Europe.

And higher wage demands are being sought to keep the workforce sweet and on board with the flexible working practices that have paved the way for production increases. One of the biggest Škoda Auto unions is seeking a double digit pay increase for 2018 and warns that the flexible working practices could be threatened if bosses don’t deliver. And parent company Volkswagen has hinted that some production could be shifted to other plants in Europe with more capacity. The promise that core production will remain in the Czech Republic hasn’t quashed the doubts that success could come at a cost.

Overall, the Czech auto sector has not been in the forefront of the electric cars revolution. A government blueprint to address that problem was adopted in 2017. And Škoda Auto has committed to producing its first electric cars in 2020.

Czech lithium reserves fuel controversy

Lithium, photo: Dnn87, CC BY 3.0

And electric cars were in some sense the sub-text of one of the biggest rows of the year with lithium the key commodity in play. Faced with the gradual slowdown of its coal industry over the decades to come, the Czech Republic could at least look forward to a mining boom from lithium, one of the key components in the batteries used to drive electric cars and other industries connected with renewable energy.

Australian-based European Metals Holdings has taken the lead in probing the nation’s lithium reserves and finding out that they are probably the biggest in Europe with the added bonus they are on the doorstep of a lot of the potential users (read German car makers). But soon after signing a non-committal and fairly bland agreement with the Czech Ministry of Industry and Trade on development of those reserves, the issue was blown up into an election issue by ANO leader and eventual winner of October’s parliamentary elections, Andrej Babiš. He called for lithium mining to be taken into state hands. The agreement is now being closely examined amid warnings that elbowing out the Australians might result in a costly arbitration case.

Away from the fray, one Czech innovator in 2017 started construction of a factory for what he claims to be a revolutionary lithium battery that could transform the global energy market. Construction of the billion crown plant began in the fall. The HE3DA battery claims much higher performance at a fraction of the price compared to conventional batteries thanks to its sandwich-style format. After mooted interest from Chinese investors, inventor Jan Procházka has finally opted for Czech investors to bankroll the first plant. Other ones should follow, for example in the United States, where local investors are likely to be tapped to cover the construction costs.