CZECHIA: Government to Gradually Raise Defence Spending to 3% of GDP from 2%

Construction activity surprised significantly to the upside in December, rising 0.5% M/M (0.2% expected, 0.2%), with residential construction leading the way.

• Private sector construction (more than 75% of total spend, with public spending the remainder) rose by 0.9% M/M to a fresh all-time high on a SAAR basis, with residential construction up 1.5%.
• The latter is picking up again after a lull in the fall, which may have been impacted by hurricanes.
• Public sector construction - which had been soaring for most of H2 2024 - pulled back sharply at -0.5%, the weakest since July 2023 and after a 0.1% contraction in November.
• There has been a clear pickup in private versus public sector spending: the 3M/3M annualized rise in private sector spending hit a 31-month high 6.2%, with public spending slowing to 7.3% by that metric, vs double-digit growth in the preceding 2 months.
• Private nonresidential investment on the other hand remained fairly soft, growing just 0.1% M/M (same as prior) and has been fairly static for 6+ months.
• Considering the apparent recovery in both "soft" and "hard" manufacturing indicators, manufacturing construction has failed to pick up any momentum - it remains below mid-2024 levels, albeit that came after an impressive tripling of spending over the preceding 3 years.
• These figures are all in nominal terms but broadly reflect what we saw in the Q4 GDP figures: residential investment rose for the first time in 3 quarters (+5.3% Q/Q annualized in real terms) with nonresidential structures contracting for a 2nd consecutive quarter (-1.1%).
• Both look to be stabilizing going into 2025.

US President Donald Trump has confirmed in a message on Truth Social that he has paused imposing tariffs on Mexican imports for one month, citing an agreement with Mexican President Claudia Sheinbaum to take steps to secure the US-Mexico border to illicit flows of fentanyl and migrants. 

• Trump: "I just spoke with President Claudia Sheinbaum of Mexico. It was a very friendly conversation wherein she agreed to immediately supply 10,000 Mexican Soldiers on the Border separating Mexico and the United States. These soldiers will be specifically designated to stop the flow of fentanyl, and illegal migrants into our Country. We further agreed to immediately pause the anticipated tariffs for a one month period during which we will have negotiations headed by Secretary of State Marco Rubio, Secretary of Treasury Scott Bessent, and Secretary of Commerce Howard Lutnick, and high-level Representatives of Mexico. I look forward to participating in those negotiations, with President Sheinbaum, as we attempt to achieve a “deal” between our two Countries."
• Sheinbaum noted the same agreement in a message on X a short time ago: We had a good conversation with President Trump with great respect for our relationship and sovereignty; we reached a series of agreements... They are pausing tariffs for one month from now.."
• Trump's message doesn't mention separate tariffs on Canada and China, with Trump scheduled to hold a second call of the day with Prime Minister Justin Trudeau at 15:00 ET 20:00 GMT. 

The January ECB decision brought few surprises, with a 25bp cut delivered alongside unchanged guidance and reaffirmed confidence in the inflation outlook (MNI’s full review is here). Post-decision ECB-speak has similarly been unsurprising, while customary post-meeting source reports provide did not trigger any meaningful repricing in EUR rates (with other domestic and global drivers more in focus). 

• Reuters’ sources piece on Thursday evening largely re-iterated the key themes from the MNI Policy Team’s pre-January meeting reporting. MNI’s story highlighted that a 25bp cut in March is widely expected amongst policymakers, while there are divisions over the timing of a potential third cut.
• Bloomberg sources suggested the ECB may stop describing monetary policy as “restrictive” come March. Expectations around such a move may develop further following the release of an ECB staff paper on neutral rates this Friday. We expect this report to contextualise President Lagarde’s most recently cited neutral range of 1.75-2.25%, which was a little tighter than the 1.75-2.50% range provided at the December ’24 press conference.
• The week ahead sees Executive Board appearances from Chief Economist Lane (Wednesday) and Vice President de Guindos (Friday).
• In the following publication, we provide a summary of ECB-speak between January 30 and February 3: 250203 - Weekly ECB Speak Wrap.pdf