Strong Czech economic development pose pro-inflationary risk, tight labor markets likely to continue in 2017

The recent economic data of the Czech Republic is a significant positive surprise. The economic growth surged in the second quarter and reached 4.7 percent year-on-year. Moreover, average real wage growth came in at 5.3 percent in the same period. According to Erste Group Research the real economic activity could be around 3 percent. The current figures suggest a risk of overheating for the Czech economy.

In spite of the subdued inflationary pressures from import prices because of low inflation in the euro area and koruna appreciation, demand pressures have pushed core inflation above the inflation target. The CNB might see a risk that the currently solid wage growth might spill over into further acceleration in core inflation. Furthermore, because of the high persistence of wage growth in the Czech economy and positive output gap, a hike could be necessary to ease the overall pro inflationary pressures and add to inflation remaining close to the target in future.

Furthermore, the tight conditions in the labor market are expected to continue for the remainder of 2017 and in 2018. The lack of new available workers in industrial sectors would continue to push wages up and spill over into other sectors. Moreover, the government rose the minimum wage in the Czech economy since January 2018 and has promised that wages would rise in the public sector, with a considerable planned rise in the education sector.

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