Producer Prices

According to the Hungarian Statistics Office (watch out PDF):

"Domestic sales prices rose by 0.4% in May 2007 compared to the previous month, and by 7.8% compared to May 2006. The export sales prices expressed in HUF were higher by 0.4% compared to the previous month and lower by 5.5% compared to the corresponding month of the preceding year. Industrial producer prices involving both of the price changes of domestic and export sales were higher by 0.4% compared to both of the previous month and to May 2006."

This explains the slightly improved trade balance, since the lower HUF value (as expressed in the 5.5% drop in real PPI for export) means that exports are now somewhat cheaper. Nonetheless, a 7.8% annual rate for the domestic PPI increase is far from being positive news or benign.

To get some idea while export real PPIs have dropped it might be useful to look at this twelve month Huf/Euro chart:




And then to put things in perspective to look at the two year one to see that things are now, more or less, back where they started. The interesting question, is, of course, what happens next?

Current Account Deficit Reducing

According to the National Bank of Hungary the current account deficit amounted to EUR 1,102 million in the first quarter of 2007 (watch out PDF) or EUR 1,105 million, according to seasonally adjusted figures. The corresponding deficit figures for Q4 2006 were EUR 1,115 m and EUR 1,191 m.:

According to quarterly data, the downward trend of Hungary’s net financing requirement (i.e. the balance on its combined current and capital accounts), calculated using the top-down approach, continued in 2007 Q1. The net financing requirement amounted to EUR 1,048 million and it was EUR 985 million, or 4% of GDP, after adjusting for seasonal effects. Expressed in domestic currency terms, the net financing requirement was HUF 265 billion. The net financing requirement, derived as the combined current and capital account balance using the bottom-up method, was EUR 1,552 million and EUR 1,469 million seasonally adjusted. This was the equivalent of 6% of GDP.

In general the news is moderately good, since, while both goods imports and exports are rising, exports are rising more rapidly than imports, which is only natural given the contraction of internal demand which is taking place.The recent path of the deficit can be seen in the chart below.




Trade in goods continued to be in surplus, at EUR 117 million seasonally adjusted and at EUR 128 million not seasonally adjusted. According to the seasonally adjusted data, the surplus on services amounted to EUR 269 million, and EUR 140 million not seasonally adjusted.

On the income and transfer accounts balance side income on debt (interest) and income on equity (dividends) (see Chart below) continued their downward trend movement, although note that the negative income on equity (dotted red line) is up from the lows reached a year ago. In 2007 Q1, the seasonally adjusted deficit on income on debt amounted to EUR 473 million, and negative income on equity was EUR 1,122 million. The general trend of both these components remained unchanged: the deficits on both income on equity and income on debt rose evenly, as a result of (i) the continued rise in reinvested earnings and (ii) increasing cost of interest payments.


On the negative side, non-debt coverage of the current account deficit was negative for the second consecutive quarter (EUR -61million), leaving bond purchases of non-residents to cover the bulk of the Q1 current account deficit. Now the worrying thing about this is how the central bank are going to get interest rates down from the current 7.75% refi rate and attract bond purchasers to fund the deficit. This is going to become important later in the year, as the economy is now slowing noticeably (and this data on employment).


Also FDI inflows into Hungary declined to EUR 481 million in Q1 from EUR 2.2 billion a year earlier. JPMorgan's Nóra Szentiványi was quoted as saying that:

“Over the past four quarters, FDI inflows fell to 3.4% of GDP while net FDI inflows amounted to just 0.7% of GDP due to the ongoing expansion of Hungarian companies abroad,"

she also noted that:

“It is not too encouraging that foreign companies in Hungary are reinvesting less than they were in previous years (0.8% of GDP down from over 2% of GDP in 1997-2005),"

Central bank foreign exchange reserves amounted to EUR 17.0 billion at end-March 2007 up from EUR 16.4 billion at end-December 2006.

Hungary To Raise Retirement Age

Portfolio Hungary reports on a new plan agreed by the government parties to raise the retirement age. I basically agree with the central bank experts that this plan is too little, too slowly, but even the central bank alternative doesn't seem anything like decisive enough.


Hungary‘s junior governing coalition party, the Free Democrats (SZDSZ), has compiled a reform list with ten conditions that its senior ally, the Socialist Party (MSZP), would need to comply with if it wants the liberals to remain in the coalition, broadsheet Népszabadság reported on Thursday. Coalition talks are set to continue on Sunday. One of the points says the parties have already agreed that retirement age would be hiked gradually.

The government is to raise retirement age from 2010 onwards but only cautiously, by one month every year, the paper said.

The parties also agreed to tighten rules on early retirement and that families with annual revenue of over HUF 8 million would not be entitled to family allowance.

A pension model elaborated by two central bank (NBH) experts last year suggested taking the retirement age (62 yrs currently) higher when life expectancy increases. They urged a raise of six months every three years, double the pace suggested by the parties. According to this model, retirement age in Hungary would be 64-65 years by 2020 and 68-69 years by 2050 for women and men, respectively.

Hungary Employment Data

The employment data for March-May 2007 is now out, and on the face of it the news is relatively good. The rate of unemployment dropped to 7.3% year on year in the March-May period, from 7.5% in the previous three-month period, according to data from the Central Statistics Office (KSH) released today. However moving forward this data now needs to be treated with some caution, since the statistical impact on unemployment dtat is now coming from two directions:

a) changes in employment
b) changes in the economically active population.

b) is especially important in the Hungarian context, since population is declining, and the working age population is set to continually reduce as a proportion of the total population as Hungary inexorably ages. So this means that the unemployment level will have a structurally inbuilt tendency to decline, and a similar phenomenon is being observed in economies as far apart as Germany, Japan, Italy, and now most notoriously Latvia (and the Baltics generally).

If we look at this chart, which comes from this article in Portfolio Hungary, we can get a better picture of the whole recent trend in employment creation and unemployment evolution, and we will see that the picture since October-December 2006 has changed substantially.

(please click over image for better viewing)



Essentially the slowdown in the Hungarian economy is clear, and now unemployment is dropping at the same time as employment creation has turned negative (largely for cyclical reasons, but just because of this the structural transition is all the clearer, as again can be seen from this chart:

(please click over image for better viewing)



Again looking at the chart below the unemployment rate seems to have peaked in the last quarter of 2005, and (barring a major recession) this may now be a ling term peak, as the structural level drops due to population ageing (and, if you like, population exhaustion, in the technical numerical resource sense).


(please click over image for better viewing)



Clearly the picture is variable, as this quote suggests:

The jobless rate for the 15-24 year old, representing 17.2% of all unemployed, was 16.8%, down 0.8 percentage points from the reading in the same period last year. The KSH said 50.1% of all unemployed have been seeking jobs for a year or more (vs. 49.1% in the previous 3 months).

Again, could it be that there are a large number of rural over 50s in the over one year unemployed group?

National Bank of Hungary Cuts Benchmark Rate

Portfolio Hungary:

The National Bank of Hungary (NBH) has on Monday reduced the base rate by 25 basis points to 7.75%, while the consensus forecast of analysts in a Portfolio.hu poll last week showed that the Monetary Council will leave rates on hold, as it did in the past seven months.

Bloomberg also covers the story here.

The decision seems to have taken many observers by surprise given the continuing inflation Hungary is experiencing. My feeling is that they aren't giving as much importance to the recent wages data as many expected them to, while the recent drop in retail sales (which may mean that the domestic economy is slowing faster than anticipated) and the upward pressure on the Forint (which is of course counter-productive when Hungary badly needs to export) may have been major considerations. Basically if you want a soft landing you have to give *some* support to internal demand, and get exports up. There is no easy path here.

The inflation rate fell for a second month in May as the effect of the austerity measures wanes. It was 8.5 percent, compared with 8.8 percent in April and a six-year high of 9 percent in March. Annual core inflation was at 5.7 percent, from 5.9 percent in April.

The bank aims to cut the inflation rate to 3 percent within the next two years. It last month raised its average 2008 inflation forecast to 3.6 percent from 3.4 percent, citing higher energy prices, and said it expects to meet its target in the first quarter of 2009.

Banks Absorb the Swiss Rate Hike

Oh, this is interesting. So the Banks aren't able to pass on the additional costs in the present environment. 80% of mortgages in Hungary are in Swiss Francs.

Hungarian banks are not expected to raise the lending rates of Swiss-denominated loans, despite a 0.25% rate hike by the Swiss central bank yesterday, Napi Gazdaság writes. The key lending rate rose to a six-year high of 2.25%.

Hungary's banks have kept their home loans and mortgage-backed loan rates flat during the last seven quarters as fiscal tightening began. Banks have adopted a wait-and-see attitude in a fragile market environment, as the austerity measures dampened demand for certain loan products, the daily commented.

Hungary To Open Health System To Private Sector

Bloomberg this morning. The implications of this need a lot of thought.

Hungary's government plans to open the country's health insurance market to a limited amount of private investment, ending the state monopoly on medical coverage that the Communists set up almost 60 years ago.

The plan, subject to parliamentary approval, will create five to seven health funds that will compete with each other for patient contracts for six to 12 months after they're established, according to the text of a speech by Prime Minister Ferenc Gyurcsany yesterday. The state will maintain a majority holding in each fund and will open the remaining stakes to companies, he said.

The proposal will offer private companies a slice of Hungary's health insurance market, with a premium revenue of as much as 900 billion forint ($4.9 billion), according to an estimate by insurance industry group MaBiSz. The Free Democrats' Alliance, the party that controls the Health Ministry, argues that Hungary's health-care providers will improve their facilities when they're forced to compete with each other for financing.

April Retail Sales Down

From Bloomberg this morning:


Hungarian retail sales fell from a year earlier in April, the second month with a decline, signaling a drop in consumer demand that may allow the central bank to cut the European Union's highest interest rates.

Retail sales fell 2.5 percent from April 2006, the Budapest-based statistics office said in an e-mailed statement today.

In a May 21 report, the central bank said it now expects to meet its 3 percent goal for annual inflation in the first quarter of 2009, rather than in 2008, as previously forecast.


Portfolio Hungary is also running the story and makes this comment:

The 2.5% yr/yr decline is the greatest fall detected in this decade. The trend gives reason for concern also because it shows that the impact of the government austerity measures was not merely a one-off dip, but a prolonged decrease. On the other hand, this indicates that consumption smoothing is not as strong as it was assumed it would be, i.e. consumers do not hold back their purchases as drastically as the drop in real wages would warrant them to.

This graph is also pretty revealing:





and this one:

Ageing and Eastern Europe

The Budapest Business Journal is running an interesting story on a World Bank report on some of the implications of ageing in Eastern Europe. Among many other details I noticed this:


"The region's rapidly changing demography is a dramatic trend with potentially major economic and social implications" and is "proceeding at a pace not seen before for such a diverse group of countries"

The full report - From Red to Gray: The “Third Transition” of Aging Populations in Eastern Europe and the Former Soviet Union - can be found here.

******************************************

Aging poses economic threat to East Europe

Rapidly aging populations will threaten economic success in Eastern Europe and the former Soviet Union if governments fall behind on welfare-state reforms and fail to promote high-value jobs, the World Bank said Wednesday.



People in the region will become among the world's oldest by 2025, and a mix of low birth rates, longer lifespan and fragile post-communist economies will likely force higher spending on health care, pensions and care for the elderly, the development bank said. The region's rapidly changing demography „is a dramatic trend with potentially major economic and social implications,” and is „proceeding at a pace not seen before for such a diverse group of countries,” a World Bank report said.

As East Europeans and Russians turn grayer, only Turkey and four small, ex-Soviet Central Asian republics will have the population growth to stay 'young countries' by 2025, with fewer than 10% of residents under age 65, the report said. Overall, the region was projected to lose 24 million people, with Russia shrinking by 17 million over the next two decades. The survey highlights how the post-communist nations of Eastern Europe, famously contrasted to the 'old Europe' of France and Germany by former US defense secretary Donald Rumsfeld, are getting old themselves. Japan and Western Europe have been getting older for decades, leading to the familiar crunch of a shrinking pool of workers to pay the taxes that finance welfare-state benefits for an aging population. But the pace of aging in Eastern Europe and the former Soviet Union is faster, and the continuing post-communist transition „makes the region's experience unique and especially challenging,” the report said.

By 2025, 20-25% of the people in nine countries - from Azerbaijan to Slovakia - will be 65 and older, according to the World Bank report, which used UN population data for its forecasts. Slovenia will have the oldest population among the 28 nations surveyed, followed by Croatia, Czech Republic, Bulgaria and Hungary, the report said. Slovenia, which adopted the euro this year in a mark of economic progress, will see its over-65 age group grow from 14% in 2000 to about 23% in 2025, falling between projections for Britain (20%) and Italy (26%), the report said. It expressed particular concern about the looming „expenditure shock” of long-term health care for the rising number of old people. „The key is to design delivery arrangements that are substantially less expensive than hospital services,” a summary of the report said. „To achieve this, it is necessary to recognize and support informal caregivers.”

Governments should also combat the labor-force crunch by raising the retirement age, encouraging flexible forms of employment and expanding financial markets to promote investment in high-productivity jobs, the World Bank said. In contrast, most demographers believe that child benefits and tax breaks that many Western European governments offer to couples with children have a 'negligible' effect on promoting births, the report said.

Worst placed to tackle the challenges are aging former Soviet nations and many countries in the western Balkans where post-communist reforms have lagged, the report said. In contrast, 10 East European nations that have joined the European Union since 2004, as well as Albania and Croatia, are well-placed if economic reforms continue at the present pace, the World Bank said. Whatever the policy mix, countries have a chance to avoid a low-growth future, the World Bank analysts said. „The danger lies in complacency,” they said.

No Early Rate Cut

According to Portfolio Hungary:

The postponed first rate cut in May might be postponed further until July at minimum, because seeing the latest dynamically growing wage data the central bank will demonstrate cautiousness again, analysts said to portfolio.hu poll today, when we asked 21 experts. Most of those who answered (18 experts) think that the Monetary Council of the NBH will leave the base rate unchanged at 8% on its June 25 rate setting meeting, and will cut 100 bps before the end of this year, while there will be a further 50 bps rate cut in 2008.

Koka Calls For End To Tight Peg

Hungarian Economy Minister Janos Koka has called for a loosening of the trading band which governs the value of the forint. He said the forint's trading limits are hobbling the central bank's ability to cut Hungary's inflation rate. He is the first Cabinet member to suggest these limits may need to be abolished, but he joins a growing chorus of economists calling for the forint to trade freely like the Polish, Czech and Slovak currencies.

Scrapping the trading band would allow the forint to strengthen enough to cut import prices and bring down the annual inflation rate, at 8.5 percent in May. Koka's comments contrast those of central bank Governor Andras Simor, who says inflation can be slowed without freeing the forint, and Finance Minister Janos Veres, who says the Cabinet is not ready to lift the limits.


The forint rose to 248.80 per euro by 1 p.m. in Budapest from 249.01 yesterday, reaching a month high. The currency is allowed to move between 240.01 and 324.71 against the euro, hampering the central bank's ability to cap consumer-price growth.

Stemming inflation, along with cutting the budget deficit from last year's record 9.2 percent of GDP, is part of conditions to qualify for euro adoption.

Decline in Hungarian Construction Activity

Portfolio Hungary has this today:

n April 2007 the volume of the construction activity decreased by 3.7% according to unadjusted indices and by 6.4% adjusted seasonally and by working days from April 2006 Hungarian Central Statistical Office reported on Tuesday. In the first four months the output exceeded the level of the same period of 2006 by 1.2%. The pace is significantly slower compared to March, when output grew by 3.3%.

The decrease in April was caused by the fall in the production of road-builder enterprises. The output of division building of complete constructions and civil engineering decreased by 5.2%, related to April 2006, but the production of building installation rose by 5%. According to unadjusted indices the construction of buildings went up by 5.6% but that of civil engineering fell by 14.8% from same month a year ago. From the beginning of 2007 construction of buildings rose at a slight pace, by 2% while that of civil engineering was at the level of the previous year.