Beach-Bound Workers Expose One-Trick-Pony Side of Czech Economy

  • Plunge in industrial production driven by car-factory holidays
  • Czech economy is ‘drastically dependent on the car industry’

The summer holiday usually creates a slump in economic activity across Europe. This year it also laid bare just how heavily one country, the Czech Republic, depends on a single industry.

A shift in vacations among carmakers helped trigger a 14.1 percent plunge in industrial production in July, the Czech Statistical Office said Tuesday, almost triple the 5.7 percent median estimate in a Bloomberg survey. The decline -- the worst since 2009 during the global economic crisis -- was driven by a 35 percent contraction in the auto industry after the country’s two largest producers, Skoda Auto AS and Hyundai Motor Co., sent their entire workforce on holiday a month earlier than in 2015.

“While this seasonal volatility has no impact on overall production, it does show the economy is drastically dependent on the car industry,” said Marek Drimal, senior economist at Komercni Banka AS in Prague. “The Czechs have benefited from their focus on manufacturing, and their cars sell very well. But the country needs to boost services, as well as research and development, if it wants to catch up with western neighbors in wealth and living standards.”

Dubbed “Europe’s assembly line” by Czech media, the country of 10.5 million people has staked its economic fortune on manufacturing. Producing a record 1.3 million cars in 2015, it made more than Italy, a country with almost six times the population. The Czechs boast one of the fastest paces of growth and lowest jobless rates in the European Union, but at 85 percent of the bloc’s average, the country’s gross domestic product per capita still lags that of richer western countries.

When adjusted for the lower number of working days from a year earlier, July industrial output fell 7.6 percent. Most of that decline was driven by the autoworks furloughs, the statistics office said. Machinery and vehicles, which the car industry dominates, accounted for 56 percent of goods sold abroad in the export-dependent economy last year.

The koruna was little changed at 11:52 a.m. in Prague. The yield on the government bond maturing in 2026 was down one basis point to 0.28 percent. The muted reaction is in line with economists’ expectations that the July plunge will be counterbalanced by a jump in August, when workers were back on production lines, unlike in 2015.

“The effect of companywide vacations and a significantly lower number of working days was extremely pronounced,” said Radomir Jac, chief economist at Generali Investments CEE in Prague. “By contrast, the data for August should show a significant annual increase in industrial production and new orders.”

— With assistance by Peter Laca

    Before it's here, it's on the Bloomberg Terminal.