Nominal wage growth visibly accelerated to 9.1% yoy and 3.0% qoq in 1Q23, on our estimates, but lagged behind price growth. Real wages were thus down by a still significant 6.2% yoy. We estimate a cautious rebound in retail sales excl. cars in April (+0.4% mom) following weak household demand in 1Q. We expect consumer spending to gradually pick up more strongly over the remainder of the year, as wage growth is set to accelerate further. Industrial production likely stagnated mom, as growth in the non-manufacturing sectors compensated for the fall in the manufacturing output. However, the outlook for industrial output continues to deteriorate amid weakening global demand. The annual growth in consumer prices continued to slow markedly in May. The lingering effect of last year’s higher comparison base and the mom decline in fuel and food prices had an impact. We expect inflation to have fallen from 12.7% yoy in April to 10.6% yoy in May. We expect the CNB to remain on hold at its next meeting in June. While the hawkish rhetoric is likely to continue, the repo rate should remain at the current level of 7%. The next move in interest rates is likely to be downward and we expect the first cut in September this year. Subsequent cuts are likely to be gradual, keeping rates higher for longer.

Nominal wage growth visibly accelerated to 9.1% yoy and 3.0% qoq in 1Q23, on our estimates, but lagged behind price growth. Real wages were thus down by a still significant 6.2% yoy. We estimate a cautious rebound in retail sales excl. cars in April (+0.4% mom) following weak household demand in 1Q. We expect consumer spending to gradually pick up more strongly over the remainder of the year, as wage growth is set to accelerate further. Industrial production likely stagnated mom, as growth in the non-manufacturing sectors compensated for the fall in the manufacturing output. However, the outlook for industrial output continues to deteriorate amid weakening global demand. The annual growth in consumer prices continued to slow markedly in May. The lingering effect of last year’s higher comparison base and the mom decline in fuel and food prices had an impact. We expect inflation to have fallen from 12.7% yoy in April to 10.6% yoy in May. We expect the CNB to remain on hold at its next meeting in June. While the hawkish rhetoric is likely to continue, the repo rate should remain at the current level of 7%. The next move in interest rates is likely to be downward and we expect the first cut in September this year. Subsequent cuts are likely to be gradual, keeping rates higher for longer.

Wage growth accelerated, but lagged behind price growth in 1Q23

We estimate that average nominal wages rose by 9.1% yoy in 1Q, following the 7.9% growth recorded in 4Q22. We also expect to see an acceleration in qoq wage growth, which we forecast at 3.0% qoq (seasonally adjusted) after 2.1% a quarter earlier. Tensions in the labour market, combined with companies’ still-solid financial situations, are contributing to the continued rise in nominal wages in the business sector. In the non-business sector, the year-on-year dynamics continued to be influenced by the increase in pay scales for some public administration workers since last September, as well as the increase in salaries for security force employees since the beginning of this year. Despite the fact that inflation accelerated from an average of 15.7% yoy in 4Q22 to 16.4% yoy in 1Q23, caused partially by the unwinding of the effect of the special energy tariff and the above-average January repricing, the yoy decline in real wages moderated to 6.2% (after -6.7% yoy previously) in a context of a 1.8% yoy decline in (real) labour productivity. In quarter-on-quarter terms, after rising in 4Q22, real wages fell again in 1Q23. According to our estimates, the purchasing power of average wages (seasonally adjusted) fell by a significant 2.5% qoq. Thus, companies only partly compensated their employees for the increase in the cost of living at the beginning of this year. In its forecast, the CNB expects, as we do, nominal average wage growth of 9.1% yoy in 1Q23 (with a real decline of 6.3% yoy). We expect nominal wage growth to remain strong throughout this year. In an environment of continued labour shortages and still-solid corporate profitability, high inflation should continue to feed through into wage demands, especially in the business sector. We expect nominal wages to rise by around 10% over the year as a whole, but this will probably not be enough to cover the continuing rapid rise in consumer prices.

Industrial output likely stagnated in April

After a solid rebound in industrial output in March fuelled mainly by the automotive sector (+11.7% mom), we expect a subsequent stagnation in April (KBe: +0.0% mom), with a significant contribution from non-manufacturing sectors. The March result was not nearly enough to avoid a qoq decline in industrial output (-0.6%). The weakness in 1Q was primarily concentrated in the energy-intensive manufacturing sectors, which are yet to rebound more significantly, and the energy output sector – likely as a result of energy savings and a warmer winter. The large driving force behind the March results – the automotive segment – is unlikely to offer another similar-sized gain. According to the Automotive Industry Association (AutoSAP) data, car production fell by 20.2% mom in April, i.e. 11.1% on a seasonally adjusted basis, after recording the highest output since November 2019 in March. This is despite the key car manufacturers reporting no major lapses in production as a result of supply chain issues in April. PMI surveys also painted a bleaker picture. The overall index dropped to 42.8 in April owing to the fall in new orders and shortening of supply delivery times amid weaker demand, following a stagnation at 44.3 in the preceding month. However, the output subindex fell less markedly by 0.5pt to 46.2. On the other hand, according to national business surveys, sentiment improved in April, although the data already available for May shows a subsequent significant deterioration.

We estimate an 0.8% mom decline in manufacturing output after a 3% mom increase in March. On a yoy basis, we estimate total industrial output to have grown 3.2% (WDA; April had one less working day this year) and 0.5% (NSA). In view of the continued weakness in PMI and the potentially worrying outlook for foreign demand – particularly weakness in German manufacturing – the outlook for the industrial output may be weakening. However, the output in the energy-intensive sectors in particular, which remains largely subdued, still has room to rebound, offering some support on the back of lower input prices – especially wholesale energy prices – and a largely improved situation in the supply chain.

Consumer spending remains on the cautious side

Following significant declines in February and March, we expect retail sales excluding car sales to have slightly risen by 0.4% mom in April. Despite a marked improvement in consumer sentiment since the beginning of the year, household consumption remained notably weak, falling by 1.2% qoq in 1Q for the sixth consecutive quarter. Overall, household spending was 9.2% lower than the pre-pandemic level (4Q19), while retail sales excl. cars were down 4.9% and 9.5% compared to the peak (3Q21) following the temporary lifting of COVID-related lockdowns. Consumer sentiment – after a minor deterioration in March – markedly improved in April, although there was a major correction in May which rendered the large improvement short-lived. Notably, the improved mood in April was helped again by the alleviation of concerns regarding future price growth. In contrast to the weak spending on both goods and services, household credit activity mildly rebounded in 1Q, especially in the mortgage market. This trend continued in April, although the volume of consumer loans declined mom. Our estimate is for a more cautious rebound in consumer spending. However, with inflation fading, nominal wage growth set to accelerate from 1Q onwards (see above) and on the back of still-significant excess savings, we expect consumer spending to pick up more significantly over the remainder of the year.

According to our estimates, car sales further declined in April by 0.5% mom, as indicated by car registrations, which were down 17.7% mom in April, i.e. 8.3% on a seasonally adjusted basis. Therefore, we estimate only a slight mom increase in total retail sales (+0.2%) in April. On a yoy basis, we expect retail sales to be 3.1% lower (WDA; April had one less working day this year) and-6.2% (WDA; -7.3% in NSA terms) excl. car sales.

Inflation approached 10% yoy in May

We expect inflation to have fallen to 10.6% yoy in May from 12.7% yoy in April. The continued rapid decline in annual CPI growth continues to be driven by a higher comparison base from last year. On a mom basis, we estimate inflation at -0.1% in May after -0.2% in April. In seasonally adjusted terms, this would mean that consumer prices stagnated mom on average in both April and May, according to our estimates. Compared with April, fuel and food were likely cheaper in May. We expect prices to fall by an average of 3.7% mom for fuel and by 1.2% mom for food (both seasonally unadjusted). The decline in food prices in May should thus be similar to that observed in April. Meanwhile, consumer energy prices remain close to government caps and we expect regulated prices to have been roughly flat mom overall. The momentum of core inflation weakened markedly in April. However, we believe that part of this was a one-off deviation, as price pressures from the tight labour market persist. As a result, we estimate that seasonally adjusted monthly core inflation accelerated slightly from 0.36% to 0.44% and rose back above 5% on an annualised basis. However, the higher comparative base will continue to dampen annual core inflation, which we expect to have eased from 10% in April to 9.1% in May.

CNB interest rates to remain higher for longer

The Czech National Bank left interest rates unchanged at its May meeting, and we expect it to do the same in June. In its latest statement, the CNB reiterated that it would intervene to prevent excessive fluctuations in the koruna’s exchange rate. The central bank continues to emphasise the role of a strong koruna in the fight against inflation. The key repo rate remained at 7% in May, where it has been since June last year. However, the vote was surprisingly close and Governor Michl’s press conference also sounded hawkish. While four board members voted for rate stability, the other three voted for a 25bp hike. Recent statements from central bankers show that rate stability is still preferred by the majority of the board. Moreover, we are not sure whether the close vote in May was really a sign of disagreement on the board or whether it was just a hawkish signal to the markets. Meanwhile, the CNB’s staff forecast does not include any further rate hikes. Governor Michl said that there was no talk of a cut at the May meeting and that rates would either be left unchanged or raised at the next meeting. We expect the CNB to keep rates at current levels until September, when it could cut them for the first time. In our view, the emergence of upside risks to inflation is unlikely to force the CNB board to raise rates further, but it is likely to be the reason for keeping rates higher for longer. This has been the main theme of most of the statements by board members so far. As a result, we expect only a gradual reduction in interest rates. We forecast a repo rate of 6.25% by the end of this year, falling to 4.25% by end-2024 and reaching the policy-neutral level of 3% by end-2025. We expect further hawkish rhetoric from the CNB as a means of dampening financial market expectations of future rate cuts and keeping the koruna at a stronger level.

Yesterday afternoon, Kofola released its first-quarter results for this year. The numbers beat the consensus by a strong +26%, but also our estimate. EBITDA increased by +95.2% to CZK218m. Revenues amounted to CZK1,712m (+13.7% yoy). Price increases outpaced volume declines as consumption continued to decline. Costs increased at a lower rate than revenues, mainly due to lower volumes and lower energy prices. Kofola's management raised the lower end of the full-year guidance.

Yesterday afternoon, Kofola released its first-quarter results for this year. The numbers beat the consensus by a strong +26%, but also our estimate. EBITDA increased by +95.2% to CZK218m. Revenues amounted to CZK1,712m (+13.7% yoy). Price increases outpaced volume declines as consumption continued to decline. Costs increased at a lower rate than revenues, mainly due to lower volumes and lower energy prices. Kofola's management raised the lower end of the full-year guidance.

In the first quarter, Kofola's sales increased by +13.7% to CZK1.712bn. Product price increases exceeded the decline in consumption. EBITDA profit grew by +95.2% yoy to CZK218m. The margin increased to 12.7% (7.4% yoy) due to a lower cost growth rate compared to sales. The lower costs are due to lower production (COS +9.6% yoy), which we underestimated in our projections. Energy costs, which Kofola buys on the spot market, were also lower. Sales, marketing and distribution costs were almost flat yoy. Administrative costs increased due to the stock option plan. At the operating level, compensation for high electricity prices had a positive effect (CZK16.8m). All three sectors of Kofola grew compared to the previous year. CzechoSlovakia was the main contributor, generating 72.1% of sales and 83.4% of EBITDA. The gastro business compensated for the decline in demand, especially in the retail sector. Financing costs increased due to high interest rates, while FX effects were positive. Net profit was CZK35m. (Last year, the company reported a loss of CZK106m.)

The leverage (net debt/EBITDA) is 2.80x (2.97x at end 2022). This is in line with the target of <3.0x. 

Full-year guidance: Kofola has revised its EBITDA guidance to CZK1.15-1.25bn, raising the lower bound from CZK1.10bn. Revenues are expected to grow +12% yoy. Leverage should remain below 3.0x and the dividend should be at least CZK11.30. EBITDA for 1Q23 is 18.2% of the full-year projection. Our FY estimates are at the upper end of Kofola's target (EBITDA of CZK1.217bn). As a reminder,1Q is the weakest in terms of seasonality and will have the least impact on the full-year result.

Near-term outlook: Revenue grew +4% yoy and +1% yoy in April and May, respectively. Volumes continued to decline by 13% yoy and 18% yoy. This continues the trend of declining demand seen in previous months. In addition, the upcoming VAT change may have a negative impact.