Shape Of German Recovery Matters For Czech Exports

The poor economic performance of the Czech Republic in Q313, showing a real GDP contraction of 1.6% y-o-y and a slowdown in export growth to 1.7% y-o-y from 2.0% in Q213, has raised the question why an export-led recovery has not yet taken place in the country. This is especially interesting given that Germany, a destination for one third of Czech exports, is already undergoing a recovery in H213, with real GDP posting two consecutive quarters of positive growth - at 0.5% and 0.6% y-o-y in Q213 and Q313, respectively, up from -0.3% in Q113. We believe that the composition of the Czech export basket largely explains why exports have not been quick to respond to the ongoing recovery in Germany.

The bulk of Czech exports destined for Germany comprise capital goods and intermediaries tied to the German export-oriented industrial base rather than finished consumption goods. The Czech export composition is reflected in the chart above, which appears to be showing Czech goods exports' historically tighter correlation with German exports than with German domestic consumption.

In this light, whereas historically exports have been the main driver of growth in Germany, growth so far this year has been domestic demand- rather than export-driven, with tepid export growth weighing on Czech exports as well.

Tied To The German Export Machine
Czech Republic - Real GDP Components Vs. Germany, % chg y-o-y

Shape Of German Recovery Matters For Czech Exports

The poor economic performance of the Czech Republic in Q313, showing a real GDP contraction of 1.6% y-o-y and a slowdown in export growth to 1.7% y-o-y from 2.0% in Q213, has raised the question why an export-led recovery has not yet taken place in the country. This is especially interesting given that Germany, a destination for one third of Czech exports, is already undergoing a recovery in H213, with real GDP posting two consecutive quarters of positive growth - at 0.5% and 0.6% y-o-y in Q213 and Q313, respectively, up from -0.3% in Q113. We believe that the composition of the Czech export basket largely explains why exports have not been quick to respond to the ongoing recovery in Germany.

Tied To The German Export Machine
Czech Republic - Real GDP Components Vs. Germany, % chg y-o-y

The bulk of Czech exports destined for Germany comprise capital goods and intermediaries tied to the German export-oriented industrial base rather than finished consumption goods. The Czech export composition is reflected in the chart above, which appears to be showing Czech goods exports' historically tighter correlation with German exports than with German domestic consumption.

In this light, whereas historically exports have been the main driver of growth in Germany, growth so far this year has been domestic demand- rather than export-driven, with tepid export growth weighing on Czech exports as well.

Looking forward, we believe the pickup in German domestic demand signals a structural shift of the economy towards an increased role of the German consumer at the expense of exports, implying headwinds for Czech exports for the foreseeable future. Over a longer time horizon, the Czech export sector may diversify away from its dependence on Germany and/or gain a higher share of consumption goods for the German market. Until we see concrete signs in this direction, weaker German export growth will translate into weaker Czech exports.

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