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Saturday, March 01, 2008

Unemployment, Producer Prices and Bond Yields All Up

Well the tendency in some key Hungarian indicators is definitely up at this moment in time. Unfortunately these are not the sort of indicators you want to see rising, like GDP growth, or industrial output, or construction output or retail sales, but ones you would like to see moving in the opposite direction like unemployment, export prices or yileds on government bonds.

On these latter the trend is decidedly up. Hungary's Government Debt Management Agency (ÁKK) sold HUF 107.4 billion worth of 5 year bonds at auction on Thursday. Demand for the bonds was not spectacular and they were sold at an average yield of 8.07%, which was up 16 basis point from the benchmark fixing the day before, and 80 bps higher than the last auction of this instrument. Accepted yields ranged between 8.03% and 8.10%.

Yields of Hungarian government securities rose again sharply (30-50 bps) in morning trade on Friday, both at the long and shorter end of the curve. Analysts are generally blaming this increase on the winding up of some Hungarian positions in the context of general global factors and the negative Hungarian economic fundamentals environment. There seems to be little liquidity in the Hungarian market at the present time.

As a result the forint also came under pressure loosing value in a fairly short space of time on Friday morning as can be seen from the chart below.

The key macro details this week have undoubtedly been producer export prices and unemployment. As can be seen in the chart below (and as explained in more detail in this post) these have now clearly moved from their downward trend, and have effectively been rising since March, indicating that some sort of "pass through" process from the domestic CPI inflation is now at work. Quite simply you can't have a fixed currency value and rising export prices if you want to live from exports by increasing your export share in the larger market. At the present moment this situation is not totally disastrous, since producer prices in most of Hungary's immediate external competitors are also rising, but clearly the longer this continues the more difficult the situation will become.

Unemployment is also rising. Again, this in itself is hardly surprising given the extent of the recession in internal demand, but it is worrying when we come to look at what is happening to employment participation rates, which - at a current level of 61.6% for the 15 to 64 age group - have now been dropping back steadily since the summer. There is some indication that among those who are leaving the labour market there are a significant number who have been accepting some form of early retirement.

Now a temprary withdrawal from the labour market in hard times is one thing, but a complete abandonment of it (via retirement) is quite another. Hungary's population is falling, as is - slowly but steadily - the population in the 15 to 64 age group.

So in the context of the decline in absolute numbers an increase in participation rates is absolutely vital. Hungary badly needs to start generating new forms of employment, and to attract an increasing proportion of workers in the older age groups back into employment. If we look at international comparisons of relevant countries Hungary obviously needs to follow to some extent the recent pattern in Germany and Japan where proportions of older workers have been improving significantly, but where the salaries earned in such employment has not been spectacular (economically speaking older workers are simply not worth so much beyond a certain age as their younger counterparts). This implies structural reforms in the labour market and pension system, and of course this may well not prove to be a particularly attractive proposition from the political point of view. In such an environment - and again as we have seen in Germany and Japan - it is hard to anticipate domestic demand becoming a key driver of growth, and hence export competitivity becomes critical.

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