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Saturday, February 02, 2008

Hungary Producer Prices, Wages and Unemployment December 2007

Hungarian producer prices are still pretty tame, although they have started to creep up again from the very stepp defaltion - especially in export prices - they underwent in the middle of 2007. One thing which it is difficult to evaluate from outside Hungary is the extent to which this upward trend in producer prices is a result of the process of "wages whitening" - whereby wages which were previously paid but remained undeclared now come above board - having run its course. Evidently during a period of time industry was able to absorb what appeared to be comparatively high wage rises since the changes were more on paper than real, but now if wages continue to rise in 2008 the pressure will be on producer prices - and hence on export competitiveness.

Accordingto KSH Domestic Hungarian domestic sales prices rose by 0.6% in December 2007 compared to November, and by 6.2% compared to December 2006. Export sales prices - as expressed in HUF - were up by 0.2% as compared to November and fell by 2.1% compared to December 2006. Industrial producer prices involving both domestic and export sales increased by 0.4% compared to November and were up by 1.6 compared to December 2006. In the whole year 2007 domestic sales prices rose by 6.4% while export sales prices fell by 4.8%. As a consequence total industrial producer prices were up by 0.2% as compared to 2006.

In November 2007 gross earnings were still rising at roughly a 9% annual rate, and public sector earnings turned upwards to a 12% rate. This is the pernicious effect of all that inflation which the central bank has so far proved incapable of purging from the system. The big danger is now that these wage increases, which are understandable in the context of the ongoing inflation, are now past on to some extent to producer prices. If this happens it will be very difficult to get export growth at the kind of rate necessary to jump start the Hungarian economy out of the marshland in which it is currently bogged down.

The number of those employed in Hungary has now been dropping steadily since the middle of last year.

This pattern has of course been reflected in unemployment, with the numbers of unemployed steadily rising.

At the same time the unemployment rate has been rising steadily. This whole process (coupled with the tendency in retail sales and VAT) is going to put increasing pressure on government deficit targets in 2008 as income is reduced and expenditure comes under upward pressure. Hence, I suppose, the EU Commission warnings, although even these may be based on growth, and hence income and expenditure numbers, which are far too optimistic.

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