Despite high input prices and worsening leading indicators, August data from the real economy was surprisingly positive. Although car production stagnated, manufacturing did very well, with growth in sectors that had shown poor results in previous months. The construction sector also managed to break the streak of month-on-month declines. Although the external trade deficit was slightly deeper year-on-year, it was mainly due to higher gas and oil prices, while the trade surplus in motor vehicles was higher year-on-year. Moreover, the year-on-year growth rate of exports outpaced that of imports for the first time in a long time.

Despite high input prices and worsening leading indicators, August data from the real economy was surprisingly positive. Although car production stagnated, manufacturing did very well, with growth in sectors that had shown poor results in previous months. The construction sector also managed to break the streak of month-on-month declines. Although the external trade deficit was slightly deeper year-on-year, it was mainly due to higher gas and oil prices, while the trade surplus in motor vehicles was higher year-on-year. Moreover, the year-on-year growth rate of exports outpaced that of imports for the first time in a long time.

Domestic industrial production rose by 0.8% mom in August, which was slightly above our forecast of 0.5% growth. Adjusted for the effect of the difference in the number of working days, production was 7.2% higher year-on-year, and 10.3% higher without adjustment (this August had one more working day than last year). The analysts' consensus had been expecting roughly half this growth (5.4% yoy) and today's result is thus a positive surprise in this respect.

Production in the automotive industry stagnated month-on-month, but other manufacturing sectors prospered. After a 4.9% month-on-month increase in production in July, development in the automotive industry was thus weaker. However, statistics on car production during the summer months are normally associated with a higher degree of volatility due to the taking of full-time holidays. Moreover, this year, due to previous production shutdowns related to component shortages, the nature of this seasonality was not entirely standard and conclusions regarding the weakening performance of the automotive industry would thus be premature due to higher data uncertainty. On the positive side, the rest of manufacturing surprised in August. The manufacturing sector, particularly in energy-intensive industries, performed very poorly in July, but recovered strongly in August. Strong month-on-month growth was reported in the chemical, pharmaceutical, electrical and mechanical engineering industries, as well as in the metalworking sector. Thus, after a 0.8% decline in July, the entire manufacturing industry increased its output by a significant 1.7% month-on-month in August. The value of industrial orders also increased in August. It was up 1.7% month-on-month on a seasonally adjusted basis, but after a 9.2% decline in July.

The foreign trade deficit reached CZK 28.2 billion in August. It was CZK 0.4 billion deeper compared to a year earlier. The result was mainly adversely affected by the rise in commodity prices on world markets, which led to a CZK 15.9 billion widening of the year-on-year deficit in oil and gas. However, oil and natural gas prices were already declining in September, which should also lead to a narrowing of the deficit in this category. The deficit on trade in chemicals was also deeper in August, by almost CZK 4 billion. On the other hand, a higher surplus in motor vehicles (by CZK 12.4bn) and electricity (by CZK 10.8bn) had a positive impact on the August balance. The good news is that for the first time since May last year, the annual pace of exports of goods (27.9% yoy) outpaced the pace of imports (25.5% yoy). 

After having fallen steadily month-on-month since March this year, construction output recorded a respectable 1.4% real growth (SA) in August. Both segments, building construction (+1%), which has largely dragged down overall construction output over the past months, and civil engineering (+1.6%), grew month-on-month. Thus, building construction was again higher year-on-year after a significant decline in July, albeit by only 0.1%. In contrast, output in the civil engineering category only moderated its year-on-year decline to -1.4% from 4.0% in July. Developments in the construction sector will continue to be plagued by high prices and shortages of building materials for the rest of the year, which could continue to constrain building completions. Weaker demand for residential property due to higher interest rates and stricter mortgage lending criteria has already been reflected in a moderation of the dramatic rise in prices of these properties. House prices in the third quarter of this year rose by "only" 2.4% quarter-on-quarter, compared to 8.7% in Q2. However, they are still almost 23% higher year-on-year, contributing to one of the worst housing affordability ratios in the EU.

Philip Morris CR (PMCR) today reported its results for the first half of this year. PMCR reported a 5.8% y/y rise in net profit to CZK1.8bn on sales of CZK9.8bn (10.4% y/y). The decline in the market share of classic cigarettes was almost offset by an increase in heated products. The decline in market share is also attributable to material supply shortages which caused production interruptions and production rescheduling. The results for the first half of the year indicate a total dividend of CZK1,350 (gross yield of 8.1%). The reported figures are in line with our estimate.

Philip Morris CR (PMCR) today reported its results for the first half of this year. PMCR reported a 5.8% y/y rise in net profit to CZK1.8bn on sales of CZK9.8bn (10.4% y/y). The decline in the market share of classic cigarettes was almost offset by an increase in heated products. The decline in market share is also attributable to material supply shortages which caused production interruptions and production rescheduling. The results for the first half of the year indicate a total dividend of CZK1,350 (gross yield of 8.1%). The reported figures are in line with our estimate.

PMCR's total revenue for the first half of the year increased by 10.4% to CZK9.8bn. In the Czech Republic, revenues increased by 14.1% to CZK5.9bn due to growth in sales of smoke-free products and favourable price development in cigarettes. Total combined market share increased by 7.9% to 8.6bn units due to increased sales in border areas (last year, the market was limited by Coronavirus restrictions). The PMCR's combined market share decreased to 39.9% from 42.9%. This was driven by a decline in cigarette share to 27.9% (31.4% a year ago). In contrast, the share of HEETS increased by 0.5 pp to 12.0%. The migration of users from conventional products to new technologies is evident. Problems with the supply of materials also had a negative impact, causing short-term production shortfalls. In Slovakia, the total combined cigarette and smoke-free market grew by 3.1% to 3.6bn units. The share of PMCR is only slightly lower year-on-year at 56.0% (56.5% a year ago). As expected, the cigarette share fell to 41.6% from 44.4%, but this was offset by an increase in the share of new technologies to 14.4% from 12.1%. Slovak sales for 1H22 are EUR113m (CZK2.8bn). Without surprise, there was an overall increase in administrative and distribution expenses. The war in Ukraine will also affect next year's results. PMCR has fixed prices for gas, its main energy source, until the end of this year. Thus, from the beginning of next year, we can expect an increase. PMCR is also investing in other energy sources to maintain production continuity. Operating profit rose by 1.5% to CZK2.1bn due to cost inflation. Net profit rose by 5.8% to CZK1.8bn due to the improved financial result.