Czech consumers continue to support the economy, for now

Retail sales increased 4.4% in real terms from a year ago in May, while shedding 0.1% compared to the previous month. The annual reading came below market expectations but remains within the solid spending range. Sales of non-food goods added 5.1% annually, food sales increased 4.2%, and fuel sales gained 2.2% from a year earlier.

Discretionary spending remained strong, as sales in non-food non-specialised stores maintained a double-digit annual growth rate of 13.2% in May. Meanwhile, sales in food-dominated non-specialised stores increased by 4.9%, and spending in food-dominated specialised stores shed 2.0% from a year ago.

Overall, this is still a relatively solid reading of consumer spending in real terms, pointing to a positive though moderate contribution of household demand to 2Q real GDP dynamics. However, the production side of the export-driven economy is somewhat limited by only a hesitant pickup in orders from abroad. If the industrial performance fails to lend adequate support to the still fragile recovery, consumers might face challenges in the second quarter strained by doubts about the solidity of the economic outlook.

Our projection of 1.1% economic expansion for this year is rather conservative and can still be achieved. However, the recovery could come under pressure should the demand from the country's main trading partners stall and industrial performance not gain solid ground. A mediocre performance in industry would, in turn, put a lid on future wage increases, and the feedback loops would start working against the rebound.