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Tuesday, July 10, 2007

Trade Deficit Signals

Ok, the Hungarian Central Statistics Office (KSH)today published first estimate figures for the May 2007 trade deficit:

During January-May 2007, the value of exports was HUF 6,718 billion, while that of imports totalled up to HUF 6,848 billion. The value of the exports is estimated to have expanded by 13 percent, while that of imports by 11 as compared to the corresponding period of 2006. In euro terms, exports grew by 17, while imports by 14 percent. The trade deficit made up HUF 130 billion (EUR 520 million), which is less than that in the same period of the previous year by HUF 122 billion (by EUR 464 million)

Put another way the trade deficit is steadily improving, but the really important issue is the reason why. Now on the face of it things are improving, since the trade deficit isobviously trending down. This is clear from the following graph (even if the thing - which comes courtesy of KSH - is unfortunately upside-down really. A piece of advice, try and imagine it the other way up, then you can see that the deficit is in fact declining):

The real question, however, is why?

Well there are different explanations for such an effect at different moments in time (ie 2005/6 is not like 2007, since back then Hungary was booming). The MAIN reason for the current improvement is the drop in the rate of increase in imports, which is evidently associated with the declining trend in internal consumption (as indicated by the April retail sales data here).

The other big part of the picture is that the rate of increase in exports is SLOWING, as the next graph makes clear.

So this improvement is nothing like good news when looked at in the most general terms. The big problem is how the National Bank are going to be able to lower interest rates in the present environment without tanking the forint. If the forint were to lose value significantly then this would have what are know as "balance sheet effects" on private households (due to the large percentage of swiss franc denominated mortgages), effects which would then seriously curtail internal consumption. Another downside risk is represented by what is happening over in the Balkans, and in particular in Latvia. If the whole environment soured, then this would be really bad news for Hungary, and if the souring produced a general slowdown across the EU, then even maintaining that slowing rate of export increase might prove difficult.

Although I wouldn't want to put a probability rating on it, I do think that there is a possibility that things could deteriorate as we get into the autumn, and I have produced a little set of "balance sheet effects" primer notes which people might find handy to glance through. This debate, which has to some extent conveniently been forgotten since the late 1990s may well be about to resurrect itself.

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