While the Czech Republic has recently basked in figures showing as the fastest growing economy in the European Union with a 4.4 percent rise in GDP in the second quarter, there is no threat at the moment that the economy is overheating. That is the conclusion from the governor of the Czech national Bank, Miroslav Singer, in the latest of his lively blogs on macroeconomic perspectives from his particular hot seat.
This, like most of Governor Singer’s blogs, is aimed at defending the low crown policy launched in November 2013 and the freedom to end the policy when the bank sees fit at the end of 2016, or as in now hinted, maybe some time into 2017.
There is, Singer says in his Monday comments, nothing to suggest in either the latest economic growth figures or inflation figures that the local economy is being stimulated too much. Such overheating would argue the need for a brake and that could only come though through higher interest rates or a stronger crown.
Looking further ahead, Singer says the trend of lower producer prices, slowdown in Chinese growth and problems in developing countries such as Brazil, and steady but unspectacular growth in Germany and the US, gives little reason to fear that the global economy is facing an upsurge in demand and prices either.
Singer points out that steps to boost economic growth, conventionally by lowering interest rates or more recently through weakening the national currency, can often have short term effects that fly in the face of the goals being sought. For one thing they decrease the purchasing power of Czech companies and citizens abroad and discourage spending in that direction. As economic growth strengthens and is translated into higher wages, companies and ordinary Czechs find that their foreign purchasing power starts to recover.
This is, Singer says, the story of the last two years. In 2014, Czech exporters enjoyed a boom thanks to the lower crown with operating profits on average around 14 percent higher and wages advancing by just over 3.0 percent in the face of almost zero inflation. When the crown results are translated into euros to take account of the around 6.0% weakening of the local currency, a much more modest picture emerges of company profits and wages rises.
In the first months of this year, with the year on year crown/euro exchange rate largely stable, the increase in company profits and employee wages is little changed when expressed in either currency and is running at around 5.0% and 4.0% respectively.
Since the low crown policy was launched in November 2013, the real increase in purchasing power of Czech companies enjoying double digit growth is up just 5.0 percent and the real purchasing power of Czech workers expressed in euros is still lower now than it was at the end of 2013. Viewed from this perspective, Singer argues, the charges of overheating lose a lot of their steam.