Saturday, July 07, 2007

Industrial Output May

Preliminary industrial output data was released last Friday by the Hungarian Central Statistics Office (KSH):

"Preliminary data about the change in the industrial output, May 2007
According to preliminary data in May 2007 the industrial gross output increased by 3.2% related to May 2006 while the index adjusted by working days rose by 5.7%. The volume of the production was higher by 8% in the first five months of 2007 than in the same period of the previous year. The volume of industrial production in May - according to seasonally and by working-day adjusted indices - was below the level of the previous month by 0.2%"

Mow first off, this data is not to be confused with the Purchasing Managers Index (PMI) which I reported on here, and secondly it should be noted that this is only preliminary data, and that detailed statistics will be released at the end of next week. That being said, the reading from both sources is consistent, and certain things are reasonably clear. Let's look at the chart:

Hungary Industrial Output May



So, month on month, output actually fell. Also looking at the year on year line, the trend at present is clearly down. Now despite the fact that some analysts point to the fact that these numbers seem low due to the relatively high peaks last year, we also need to think about what they mean in terms of GDP GROWTH forecast for this year. It is still early to reach a judgment on this, but clearly we are before the possibility that the forecast will need to be revised down, and possibly substantially so.

As PH points out, the position is a mixed one, since exports continue to rise (see this post), and at a reasonably healthy clip (around 10% y-o-y growth). So it would seem that it is in domestic demand where the present weakness is being felt, and this is consistent with the April retail sales data, which showed a significant slowdown.

So obviously Hungarian growth is obviously now dependent to some considerable extent on growth in other EU economies, so it should be noted in this regard that, according to the latest Eurostat retail sales data (May) released on Thursday sales fell back in May when compared with April:

Monthly changes

In May 2007, compared with April 2007, “food, drinks and tobacco” fell by 0.3% in the euro area but rose by 0.1% in the EU27. The non food sector decreased by 0.6% and 0.2% respectively. Among the Member States for which data are available, total retail trade increased in eleven Member States and fell in six. The largest increases were observed in Lithuania (+3.6%), Estonia and Slovakia (both +2.7%) and Latvia (+2.6%), and the highest decreases in Luxembourg (-10.6%), Austria (-2.4%) and Denmark (-2.3%).


Statistics for Hungary were not among those released, but the trend across Europe at this point does not look as positive as it did, say, six moths ago. Perhaps we are now beginning to get a measure of the drag the 3% VAT hike in Germany may exercise, and how this can feed across the eurosystem.

Similar conclusions appear to have been reached by Dániel Bebesy, at the CIB Bank, Budapest


“The slowdown of IP does not bode well for the GDP growth outlook, which is likely to remain below potential thus serve as an argument for monetary easing."

The thing is, as I will explain in more detail in future posts, monetary easing may not be as easy an option as it seems due to the very high percentage of mortgages (around 80%) which are denominated in Swiss Francs. Lowering the interest rate would surely reduce the value of the forint, and thus raise interest payments for households on these mortgages, so there would be a sort of tug-of-war between two opposing impacts. Nothing from here on in is going to be easy.

Winding up, the Economist has a look this week at the situation in the Baltics, along the road it mentions Hungary:

"The other early candidate for a crash has long been Hungary, which admitted last year that it had been running a budget deficit of 10% of GDP. But a combination of tax rises and modest spending cuts has trimmed the deficit. Exports and industrial production have risen. The central bank has begun to cut interest rates. Hungary has been “disgustingly lucky”, says Juliet Sampson of HSBC, a bank."

Well, as we have just seen, industrial production is no longer rising the way it was, and indeed has fallen in three of the last four months, but lets just hope, along with the Economist that Hungary continues to be “disgustingly lucky”.
Posted by Edward Hugh at 8:33 AM

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Hungary At A Glance

Welcome to Hungary Economy Watch Blog. Below you will find the normal chronological blog posts. But first we would like to present some charts which provide background data which we hope will help the first time reader better assess and get to grips with the argument being presented here. Here you will find charts for Hungarian male life expectancy, fertility, quarterly GDP growth, inflation, household demand, retail sales, and import and exports growth. Please click on thumbnails for better viewing.

On the left you can see a chart for Hungarian male life expectancy, and on the right there is one showing Hungary's population development. Just why such factors are important, and need to be taken into account along with more standard macro economic data in order to understand what is currently happening in Hungary and what might subsequently spread across Central and

Eastern Europe can be discovered by reading my Hungary analysis:Just Why Is Hungary So Different From the Rest of the EU 10?The basic arguments being advanced here are that long term fertility and life expectancy do matter, since in the long run they condition the labour force and consumption patterns, and with these inflation and internal demand.



Above left you can see Hungarian ferility, and above right the evolution of the population median age, which are also key parameters, since they influence saving and consumption, and with these internal demand growth. On either side here you can see charts for inflationand quarterly GDP.


Next on the left we have a chart for recent movements in private internal consumption (which shows us the state of internal immediate consumption demand) while on the right we can see changes in constuction activity, (which serve as a nice proxy for fixed capital formation). Finally the chart on the bottom left shows a comparison of Hungary's trade balance 2006 and 2007,


while on the right you can see the evolution in non-forint mortgages for immediate consumption purposes. Arguably these are all the data points you need to understand my lengthy post on why we face a possible recession in Hungary, and why post-recession Hungary may be converted into yet another export dependent economy.


2008 Forecasts: The OECD in December revised their 2007 Hungary forecast down to 1.8%, and 2008 to 2.6%. These numbers are very hard to accept. I will be very surprised if we see calendar year 2000 as high as 1.8%, but more to the point 2.6% seems to be assuming a strong rebound, an assumption for which there is no real substantive evidence. In particular even to get what growth we have been getting in 2007 the Hungarian govenment has been running a deficit of around 6% of GDP. This is going to tighten yet further in 2008, so there is no supportive fiscal environment. And as I keep arguing, it is very hard to see a supportive monetary one. The IMF in their October World Economic Outlook also put a similar figure of 2.7%, while the EU commission in November 2007 came in with the same 2.6% as the OECD.

Perhaps the prize for the most exaggerated prediction here must go to GKI Gazdaságkutató Zrt, who argue that Hungary should expect the incredible annual growth rate of 3.5%. My own view is much more nuanced. I think I am reasonably confident in holding to my recession forecast for 2008, although of course, "recession" does not mean negative growth for the whole year (technically it is simply 2 consecutive quarters of negative growth), so we might then go on to see what, between 0.5 and 1% growth over whole year 2008 (and the only really doubt is whether the contraction starts in Q4 2007, or in Q1 2008). But it is what happens in 2009 and 2010 that matters really, and at this point so many variables are in play (and interrelated ones to boot) that I can only say I envy those who have the courage - or the temerity - to stick their necks out). And of course, if we get a large correction in the value of the forint, then all those carefully weighed and weighted forecasts will, without a shadow of a doubt, go straight and directly off into the bin.