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Thursday, February 14, 2008

Hungary Q4 2007 GDP Growth

Hungarian economic growth, which was the slowest in the European Union in 2007, not surprisingly continued to slow in the fourth quarter, growing by a mere 0.1% quarter-on-quarter over the October-December period, according to seasonally adjusted first estimate figures released by the Central Statistics Office (KSH) on Thursday. The KSH also reduced the Q3 growth figure to +0.2% zero from +0.3%. At this stage it is worth pointing out that this is a preliminary - flash - release, and carries a margin of error of 0.2% - larger than the growth rate itself, and that the economy could just as easily have contracted as expanded. To really know the answer to this question we will have to await the detailed release in early March, and then (see what just happened to the Q3 data) subsequent revisions when Q1 2008 data are released.Nonetheless, as can be seen from the chart below, the steady disintegration of the Hungarian economic growth process is clear enough.

Economic growth year-on-year in Q4 was a measly 0.7% (using seasonally and working day adjusted data), while the comparative figure for Q3 was still only 1.0%. Analysts had been forecasting 1% year on year for Q4, so they have largely been caught on the (over optimistic) upside.

Annual economic growth in the whole of 2007 came in at 1.3%, the KSH added.

The consensus forecast among analysts in a Portfolio.hu poll earlier last week was for a yr/yr growth of 1.0% in Q4 (the outcome was, remember 0.7%). As recently as last October's World Economic Outlook forcecast the IMF - to take but one example - was expecting Hungary to come in with a 2.1% annual growth rate for 2007, but economic growth for whole year 2007 actually came in at 1.3%, according to the latest KSH data. The 2007 growth rate was the slowest annual growth since 1996, and the important point to grasp is that this situation is unlikely to improve in 2008, in fact it is most probably going to deteriorate, with growth of less than 1% being the most likely outcome as I explain here, and in more theoretical detail here). And, of course, the results we have been getting do tend to lend weight to my view.

As indicated above since the seasonally adjusted numbers have an associated degree of uncertainty which is higher than the actual estimated q-o-q GDP growth rate (the KSH tends to carry out several subsequent adjustments), we cannot exclude the possibility that at this point the Hungarian economy is already in recession. According to the technical definition, recession is when GDP drops in two consecutive quarters. Hungary's lacklustre economic growth compares, of course, with third-quarter expansion rates of 6.4 percent in Poland, 6 percent in the Czech Republic, 14.1 percent in Slovakia, 4.5% in Estonia, 9.6% in Latvia, 8.1% in Lithuania, around 6% in Romania and 5-6% in Bulgaria we could draw the conclusion that "Hungary is still the very sick man of central Europe and by some distance" (Neil Shearing, Capital Economics, London), but I would raise a rather different issue, namely: just how much can we learn from following Hungary about what might happen in the other "high-risk-of-correction" EU10 economies - the Baltics, Romania and Bulgaria, basically - one the "correction" takes place. This I would say is the importance of what is now happening in Hungary, the chink of light it throws - for those who are able to see - on what might get to happen next elsewhere.

The response in the government bond market was predictable on Thursday, lower demand and higher yields. As a result the Government Debt Management Agency (ÁKK) decided to sell HUF 10 bn less 3yr bonds and HUF 5 bn less 10yr bonds than they had originally intended. Accepted yields on the 3 yr bonds ranged between 7.89% and 8.05%, while on the 15yr ones they were between 7.20% and 7.27%.

Meantime, while the HUF firmed to some extent on Thursday, the downward trend continued on Friday, with the currency closing at 253.59 to the euro.

While the currency has now climbed back a bit off the December 7th low, it once more turned South on Friday, so while the initial hurdle I wrote about in my earlier blog post has now been crossed, the situation needs constant and almost daily monitoring, until we arrive at the next hurdle, the next central bank rate setting meeting on Feb 25.

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