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Monday, March 10, 2008

Hungary Q4 2007 GDP Detailed Breakdown

Hungary's gross domestic product grew by 0.1% quarter on quarter in the fourth quarter of 2007, according to revised seasonally and working day adjusted data published by the Central Statistics Office (KSH) last Friday. Hungarian GDP at this point is virtually stationary and the largest adjusted quarter on quarter GDP growth during 2007 was the 0.2% rate achieved in Q3.

Economic growth in Q4 was 0.8% year on year on an unadjusted basis and 0.7% when allowance is made for working day impacts. The comparative figures in the previous quarter were 0.9% and 1.0%.

Hungarian economic growth thus came very close to total stagnation in 2007, and this does not bode well for 2008, when (even if financial market turbulence does not have a direct impact via forint effects) we can expect the central bank interest rate policy to continue to put downward pressure on real wages and hence domestic consumption, further fiscal tightening on the government front to restrain government spending (the deficit was still at 5.6% in 2007) and a worsening in the external environoment and in price competitiveness (via domestic) price inflation to mean that little in the way of meaningful growth is likely even if Hungary doesn't fall straight into outright recession.

The engine of what growth there was last year was industrial output, which achieved a 6.2% year on year growth, this being largely attributable to the strong 10.4% rate of export growth. Within the industrial sector manufacturing industry grew by 6.8% year on year.

despite the fact that total fixed capital investments were largely flat over the year (due mainly to the collapse in construction activity) the level of investment in machinery and equipment grew by 10.9% in 2007, with the increase being largely driven by investments of manufacturing industry. The volume of other investments (which have little weight in the total) rose by 8.3%, while construction investment decreased by 6.8%. In 2007 the manufacturing component - which constitutes 25% of total investment - expanded significantly, by 23.9%. Unfortunately we may be seeing to some extent here the "one off effects" of the construction and installation of the 500 million euro factory which was built for South Korea's largest tyre maker Hankook Tire in Dunaujvaros during 2007 - and it may be hard in the present climate to attract similarly important projects in the near future - since within manufacturing itself the statistics office highlight the high value of investments in the manufacture of rubber and plastic products as playing an important part. Nonetheless the investment increase was also deemed to be significant in the manufacture of electrical and optical equipment, radio, television and communication apparatus as well as in manufacture of transport equipment.

The only slight glimmer of hope in the whole bleak Hungarian outlook I can find at the moment could be that very slight uptick in total fixed capital investment - on a year over year basis - that we can identify in the chart above toward the end of the year. Construction may be now bottoming out, and even if we should not expect much in the way of growth it will gradually cease to be a drag on the situation. So if the manufacturing investment component can continue to rise, and create jobs, and the price competitiveness issue can be resolved, then in the medium term we could see more and more in the way of export driven growth. But this is early days yet, and there are plenty of very difficult hurdles to get across before we reach there from here.

Annual economic growth in the whole of 2007 came in at 1.3%, greatly below the expectations of most analysts. This was the smallest annual GDP growth rate in the whole Europe Union.

For the rest there were few surprises in Q4, with private consumption remaining in negative territory (although slightly less negative than in Q3). Surprisingly government consumption was up considerably (+5.5% vs -6.1% year on year on average in previous three quarters) and this pushed total domestic consumption up to -0.3%year on year from -2.3% year on year in Q3. This boost from government spending is hardly likely to be sustainable in the coming quarters.

In the chart below we can see that private household consumption generally did better than total household consumption since the latter includes government transfers to housholds, which of course have been considerably down, and are likely to continue to remain down.

On the production side, there was a slight uptick in services that saved the aggregate reading from slipping to even lower levels. Services accelerated to a 1.8% year on year rate - up from 1.2% in Q3, despite an across the board weakness in the other components. In the services category the relatively strong performace of financial and real estate services (up 2.7% year on year) is worthy of note.

Growth rates in this sector are of course well down on the peaks in 2002 and 2005, but still, something is better than nothing. If we look at the chart for Real Estate and Financial Services as a % of total GDP on the production side we can see that - despite a sharp fall in the autumn of 2006 - the share has generally been up over the last two years.

What makes this uptick just a little worrying from a sustainability point of view is that it coincides in time with the very strong increase in Swiss Franc mortgage activity, and in particular in the contracting of mortgage finance for personal consumption (refis, or equity withdrawals, see chart below ) and this source of temporary underpinning for domestic consumption may turn into a clear liability if there is any sort of sharp increase in risk aversion in the financial markets.

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