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Thursday, September 06, 2007

Industrial Output and Exports July 2007

According to the KSH preliminary release Hungary's industrial output was up again in July, which is obviously good news. Let's look at the deails. Firstly the working day adjusted volume index for industrial production.

So industrial output has turned upwards since May, and as I say, this is obviously good news. There is a lot of speculation that this is due to an upturn in exports, and this explanation seems to be a logical one, since domestic demand is basically in decline. However, as can be seen from the chart below which tracks month by month changes in output, the rate of increase in July slowed from the very strong rate achieved in June, so we need to watch carefully what happens next. This being said the position is a lot better than might have been feared. The issue will be to maintain this expansion in the export sector going into the autumn.

Now in order to interpret this data we need to examine the detailed report on industrial output when it becomes available, and the July trade figures, a preliminary version of which have today been made available by the statistics office. We also need to be aware that this data is from July, and we still do not know at this stage to what extent Hungary's main external customers are themselves slowing down following the recent financial turmoil, but this vulnerability is of course the price you pay for export dependence.

Now, according to the KSH:

During January-July 2007, the value of exports was HUF 9,603 billion, while that of imports totalled up to HUF 9,763 billion. The value of the exports is estimated to have expanded by 12 percent, while that of imports by 9 as compared to the corresponding period of 2006. In euro terms, exports grew by 18, imports by 14 percent. The trade deficit reached HUF 160 billion (EUR 639 million), which is less by HUF 256 billion (by EUR 958 million) than in the same period of the previous year.

So let's look at some charts. Firstly lets look at the year on year annual monthly changes in exports and imports:

Now the first thing that needs to be said is that while these results are obviously positive, they are nothing to start dancing up and down in glee about. July was a positive month, but not as good as June, and most of the improvement in the trade balance comes - as was to be expected - from a very slow rate of increase in imports. This becomes clearer if we look at the evolution of absolute values.

What we can see here is that the level of both exports and imports actually fell in July in comparison with June, so it is not clear that this data can explain the industrial output data, and if we take into account the very weak new order showing that Hungary registered in August as released by Eurostat I think we need to proceed with caution. It is also interesting to note the way in which imports have seemed to track exports in recent months, to get a real export lead recovery we should look for the export curve to break loose in an upward direction.

This is doubly the case if we look at a breakdown of where the exports actually go. Germany is the biggest single customer, accounting for 29,85% of the toatl in the January - June 2007 period (and a y-o-y rate of increase of 17,8%). The EU12 also take a big chunk between them - 18.7% of the total (and a massive y-o-y rate of increase in the Jan - June period). Now both of these areas must be viewed as having strong downside risk in H2 2007. Germany is obviously slowing already, and may even have a recession in the winter, the EU12 have been overheating considerably as a group (obviously this isn't the Hungarian case) and are generally slowing. So the current comparatively strong export showing has to be viewed with considerable caution. The inability of the Bank of Hungary to lower rates due to the domestic problem of Swiss Franc mortgages, and the resulting comparatively high value of the forint must be the main downside element in trying to push up export shares in n increasingly unfavourable environment, although - as I keep hammering - a drop in the value of the forint would be very bad news on the domestic demand front, indeed rather than simply bad news I would say disastrous news. But what will be will be. Watch this space.

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