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Tuesday, July 24, 2007

Retail Sales May

Well the latest retail sales news isn't exactly encouraging:

Hungarian retail sales dropped by 0.1% month on month in May, according to data adjusted for calendar and seasonal effects, the Central Statistics Office (KSH) has reported on Tuesday. This was the fifth consecutive month when the KSH detected a m/m decline, although this fall was smaller than the one in April (revised upward to -0.6% from -0.5%). Accordingly, the indicator gauging changes in the past 12 months has also dropped - it stood at -2.8% in May, which is the greatest fall detected in this decade.

Looking at the chart below it is clear that they have fallen consistently for the last five months for which we have data, and indeed apart from a spike in November-December they have been in sharp decline since last August.

This makes the NBH decision yesterday a little more surprising, since you would have thought they would want to do something to try to support domestic demand at this point. Most commentators are agreed that most of the inflation will drop out of the system in the autumn - especially since Hungary is now about to become the one new EU accession country where labour supply isn't a problem - and my only conclusion is that they must be worried about the value of the Forint and all those Swiss Franc mortgages, and not doing anything to make matters worse.

Classic textbook economics tells you that right now the best move for Hungary would be to devalue in an attempt to export its way out of trouble, and aggressively cut interest rates, while keeping a tight rein on government spending, but for one reason or another Hungary may just not be able to do this.

This is in danger of becoming a real tragedy, since this is obviously the moment of golden opportunity across Eastern Europe (as everyone else pushes up against capacity limits). But this situation will not last for ever, and again the biggest danger is a general correction with Hungary getting caught up in the mess.

We also need to keep a careful eye on the evolution of employment data. The total number of economically active people and employed people has been falling, and I have difficulty interpreting what this means. On the best account people could simple be "discouraged" and leaving the labour market. On the worst account some may be being attracted abroad by the general boom which is taking place. From this distance this is very hard to say.

The best case scenario I can see is that Hungary goes through an extended period of below par growth, just like Portugal from 2000 to date.

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