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Sunday, August 19, 2007

Construction Activity in Hungary

According to the latest release from the Hungarian Statistical Office the volume of construction activity in Hungary decreased in June 2007 by 15.8% when compared with June 2006. In the first six months of 2007 output was 4% below the level of the same period for 2006. When compared with May 2007 production fell by 8.9% based on the seasonally and working days adjusted index. The general downward trend in activity can be seen from the chart below.

But what can also be observed is the steepness of the decline in June, which can also be noted in the chart for monthly changes (see below). As a result of the June drop - which according to the statistical office occurred in both large construction companies involved in areas like road construction and small firms involved in residential construction activity - the 12-month index fell 15% to reach its lowest since 2003. Although the construction industry constitutes a comparatively small share of the overall Hungarian GDP (in the region of 5%), these poor results may partly help to explain Hungary's poor Q2 GDP growth figure, although we will have to await the detailed breakdown of Q2 GDP due in September to confirm this.

The construction of buildings fell by 15.2% and that of civil engineering decreased by 16.6% when compared with June 2006. Since the start of 2007 construction of buildings has fallen by 1.3% while civil engineering is down by 6.8% as compared with the first six months of 2006. Month on month (ie when compared with May 2007) the construction of buildings decreased by 7.4%, while activity in civil engineering fell by 5.2%.

The stock of orders at the end of June was 41.3% below the level for June 2006. Within this, the stock of orders for building construction decreased by 23% while that for civil engineering was down by a half.

All of this is consistent with a sharp reduction in government spending (civil engineering) and in domestic consumption (housebuilding), as such it really should have been expected, although as I say, given the small share of construction in GDP this reduction alone cannot explain the low Q2 reading.

The extent of the slump in construction activity is also very clear from the following chart which shows annual changes in output by month. The extent of the drop in June is very clear, as is striking the fact that positive y-o-y readings have only been registered in 3 months since the start of 2006.

What is really puzzling me is what can be seen from the chart below, which shows trend construction from the start of 2004. As can be seen there was something of a boom in 2005 which then petered out, since which time it has been downhill all the way. What I don't really understand is why construction should have slowed after mid 2005, while across the rest of the EU8 and in the rest of Europe generally activity was accelerating. This just seems to be one more area where the evolution of the Hungarian economy seems to be somewhat out of step with the rest. I only wish I understood why. Comments welcome.


Rikk03 said...

Reason is the high tax compared to the other new EU countries. Hungary had its EU accession property miniboom, it was time for boom in the other new EU countries.

International property investors have turned away from Hungary - although I expect this to change in 2009 where Im expecting a second phase of growth.

As for domestic demand .... not much of that.

Im busy buying property before the wages start to rise along with economic recovery, as the country gets back on track with regards to public sector expenditure and next mini boom prior to EMU.

Edward Hugh said...

Hi Rikk

Well as you can probably see, I don't buy the consensus forecast at all here. You have to think about the ageing and declining population aspect.

My outlook is way below consensus, but I am being cautious at the moment, as all of this will get much clearer as we move forward.

If you are thinking property, you need to take a look at Japan and Germany, not much movement since 1995.

"Im busy buying property before the wages start to rise"

Well all I can say is, it is your money, but be careful. I wouldn't be doing this.

Just keep reading going forward and you will start to get the picture. Things should be a lot clearer in 3 to 6 months.

Rikk03 said...

Your statement .....

"You have to think about the ageing and declining population aspect"

I agree entirely, which is why I am focusing on top quality apartments aiming at the international business executive market, I am only buying in new developments - offplan not to complete until end of 2008.

Im doing everything in Euros - staying away from Swiss Franc and the Hungarian currency. Im eager to get my money out of the UK before the debt bubble and subprime mess causes a collapse in the UK.

Property prices in Hungary are already one of the lowest in the new EU and Hungary's austerity measures will enable it to recover quickly if there is a EU wide house price fall (compared to other EU countries).

There is no house price bubble in Hungary. You could say im buying near the bottom (if not at the bottom) - im aware of the fact that 2008 will be a tough year, however 2009 will be inspirational.