Well, the May wages data are sounding off alarm signals all over the place, but I really can't understand why, in the sense that I don't know what else people were expecting. Anyway, the financial markets are forecasting rate cuts, and as a consequence the Forint has started to come under pressure. Again, none of this is especially surprising, since in many ways Hungarian monetary policy is essentially in a trap, and this has been evident for some time. The National Bank cannot lower rates either very far or very fast without bring the Forint tumbling down, and in doing so pushing dramatically up the debt service costs on all those Swiss Franc mortgages. The impact of this on consumption would doubtless more than undo any positive lift to consumption which could be obtained from lowering rates. So the Bank may try to lower, but it will be a really tricky operation, and I doubt they can go very far without running into problems.
Meanwhile domestic consumption looks set to follow its downward course, so things are likely to get worse rather than better on that front. Lets just hope things don't get too bad in the Baltics at the same time.
Now for the wages data:
The after-tax income of wage earners rose 1.3% in May year-on-year, which translates into a 6.6% decrease in real wages with the inflation rate taken into consideration. On the other hand, the nationwide headcount of the public sector has increased for the first time in several months.
In the meantime, gross wage growth - the single most important indicator impacting the country's inflation rate - hit a new high. Gross wages in the private sector were 12.4% higher than a year earlier, another all-time high ever since statistics exist for this indicator.
This seems really to be doubly bad news, since a 12.4% gross wage growth translated into a 1.3% after tax rise (due presumably to the taxation effect of the belt-tightening package) and this 1.3% rise becomes a 6.6% decrease when you take inflation into account. So real wages are falling, whilst nominal wages continue to rise rapidly (and these, of course, are what influence export competitiveness).
Bad news all round I'm afraid, and nothing here looks too promising, and especially when you look at the state of the domestic construction industry.
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3 comments:
Probably it would be difficult to justify with hard data until early next year but many read these data positively these days.
The fact that the private sector has produced a 12+ perc cent wage increase while only 1.3 per cent after tax does not translate into an inflationary pressure. Most people are convinced that the source of the increase comes entirely from low-payed jobs that fully evaded tax payments in the past (especially from the construction and tourism sectors). In Hungary the minimum wage is largely exempted from taxes and most employees in these sectors were payed exactly the minimum wage on the records and were given illegal cash payments which only fueled consumption.
From this year people have to prove that they have contributed to the social welfare system each time they see a doctor. While the employment rate hardly changed, the number of social security payers started to rise very fast. In Hungary social security payments are managed by the tax authority. If you pay social security contribution it is almost impossible to hide its source from the tax authority.
All in all, many low pay wages moved from the exempted minimum wage level a bit further up and started to pay social security and tax contributions. The actual amount of money people can spend has actually decreased somewhat and the social security budget had monthly surpluses for the first time since they were established.
This is good news for the budget and not very good news for the domestic demand. However, I believe that this effect is rather good than bad for the competitiveness, because export-oriented companies tend to be good taxpayers, too, and they had a comparative disadvantage over the black economy. Now that the black economy starts to share the burdens of the public deficit everybody might be better off.
Two links (in Hungarian): the number of new social security payers have increased by 140 000 in the first 4 months and preliminary data on the first half year in pdf.
Hi Daniel,
Thanks for the comments and the explanation. I also noticed a couple of typos reading back through the post, nothing serious, but this was a howler:
"The National Bank cannot raise rates either very far or very fast without bring the Forint tumbling down,"
of course it should have been
"The National Bank cannot *lower* rates either very far or very fast without bring the Forint tumbling down,"
The chance of them raising rates again in this environment would be very slim indeed I imagine. Now for your comments.
The explanation you give about "whitening" in the data is interesting, and fitted in with what I had been picking up.
"The fact that the private sector has produced a 12+ perc cent wage increase while only 1.3 per cent after tax does not translate into an inflationary pressure."
No, I agree, what we are likely to have pretty soon in Hungary is deflationary pressure as soon as the round of tax and social security hikes and energy cost increases works its way through the system.
"While the employment rate hardly changed, the number of social security payers started to rise very fast."
Yep, Hungary is the one place in Eastern Europe at the moment where I don't seem to be predicting a labour supply problem, since growth isn't going to be strong enough, and job creation isn't likely to be fast enough to produce one.
The risks are others in Hungary. The increased contributions you mention simply are money that people previously had, but now don't. Obviously it is positive that this all now comes onto the table rather than staying underneath it, but as you note this will reduce consumption. It is the rate of reduction in domestic demand we need to look at going forward.
But we still need to look at the inflation numbers, which are not being driven by wages rises but by increases as mentioned above. These costs can be passed on to exports, and this can make exporting more difficult, its as simple as that.
The ideal thing to do now in text book policy would be to bring the interest rate down fairly aggressively as we get into the autumn, since this would both help domestic demand and weaken the forint to help exports, but the private non forint debt element is going to be a big headache here.
Also you need to think about your customers. As far as I can see Germany is a big one, and then the rest, Austria, Italy, France etc are all quite small proportionately.
If growth slows significantly in the eurozone (and I am full of downside risk fears for Germany, fingers crossed) in the second half then exporting can get to be more difficult, and anyway, with a high euro, goods from China - and even Japan - look very attractive.
So there is a lot to think about here.
"Now that the black economy starts to share the burdens of the public deficit everybody might be better off."
Yep, well this part is for sure. The sad thing is the way they went about the whole thing (the politicians etc I mean), since given that there was this potential source of revenue knocking about they must have been fools to get into so much mess with the EU and the international financial set, a mess which has now has lead to the austerity package, and all the other woes you are about to go through.
I think what happens elsewhere in eastern and Central Europe is now critical for you, since if there is any kind of general "correction" then things will hardly be rational.
Apart from the Baltics I think you need to watch Poland, Romania and Bulgaria. The labour supply issue is the key.
Anyway, thanks again, and drop by from time to time with an insight, since its always interesting to get another view, and have a chat.
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