Wednesday, April 30, 2008

Hungary Producer Prices March 2008

Hungarian producer prices show ``worrying signs'' that rising oil and food costs are making other consumer goods more expensive - that is that the second round consequences of these rising prices are making themselves evident and this alone may prompt the central bank to decide on yet another interest rate increase, economists at Intesa Sanpaolo SpA said this morning.


Prices ``in the consumer goods producing branches show some worrying signs, suggesting that external shocks started to impact a broader range of product categories,'' said the economists, led by Mariann Trippon. They forecast a third consecutive rate increase in this month to 8.5 percent.



Hungary's March industrial producer price inflation was up to 5.7% year on year from 4.9% in February, according to the Central Statistics Office (KSH) last Wednesday. Month on month prices were up by 0.2% in March, down from the 0.7% rate registered in February.

Domestic producer price inflation came in at 10.8% year on year in March (versus 10.6% year on year in Feb and +7.8% in March 07) and in monthly terms it was up by 0.8%, slightly above the increase of 0.5% in the previous month (and the 0.4% for March 2007).

Producer prices in manufacturing industry were up 0.1% month on month and 4.4% year on year, against 0.7% and 3.4% respectively in February.

More disturbingly export sales prices in March rose by 2.0% year on year against an increase of 0.8% in the previous month and a drop of 5.5% in March 2007. Month on month there was a 0.3% decline in export prices, following an 0.8% increase in February and 0.4% increase month on month in March last year.



Food price inflation came to 0.6% m/m (vs. 0.9% in Feb) and 13.8% yr/yr (vs. +13.1% in Feb). On the domestic front food price inflation ticked up to 0.6% m/m from 0.2% in Feb, but increased some in annual terms to 13.0% from 12.5%.

Given that the Hungarian economy is now structurally dependent on exports for growth these increases in export prices are hardly to be welcomed, to say the least.
Posted by Edward Hugh at 7:07 PM

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Hungary At A Glance

Welcome to Hungary Economy Watch Blog. Below you will find the normal chronological blog posts. But first we would like to present some charts which provide background data which we hope will help the first time reader better assess and get to grips with the argument being presented here. Here you will find charts for Hungarian male life expectancy, fertility, quarterly GDP growth, inflation, household demand, retail sales, and import and exports growth. Please click on thumbnails for better viewing.

On the left you can see a chart for Hungarian male life expectancy, and on the right there is one showing Hungary's population development. Just why such factors are important, and need to be taken into account along with more standard macro economic data in order to understand what is currently happening in Hungary and what might subsequently spread across Central and

Eastern Europe can be discovered by reading my Hungary analysis:Just Why Is Hungary So Different From the Rest of the EU 10?The basic arguments being advanced here are that long term fertility and life expectancy do matter, since in the long run they condition the labour force and consumption patterns, and with these inflation and internal demand.



Above left you can see Hungarian ferility, and above right the evolution of the population median age, which are also key parameters, since they influence saving and consumption, and with these internal demand growth. On either side here you can see charts for inflationand quarterly GDP.


Next on the left we have a chart for recent movements in private internal consumption (which shows us the state of internal immediate consumption demand) while on the right we can see changes in constuction activity, (which serve as a nice proxy for fixed capital formation). Finally the chart on the bottom left shows a comparison of Hungary's trade balance 2006 and 2007,


while on the right you can see the evolution in non-forint mortgages for immediate consumption purposes. Arguably these are all the data points you need to understand my lengthy post on why we face a possible recession in Hungary, and why post-recession Hungary may be converted into yet another export dependent economy.


2008 Forecasts: The OECD in December revised their 2007 Hungary forecast down to 1.8%, and 2008 to 2.6%. These numbers are very hard to accept. I will be very surprised if we see calendar year 2000 as high as 1.8%, but more to the point 2.6% seems to be assuming a strong rebound, an assumption for which there is no real substantive evidence. In particular even to get what growth we have been getting in 2007 the Hungarian govenment has been running a deficit of around 6% of GDP. This is going to tighten yet further in 2008, so there is no supportive fiscal environment. And as I keep arguing, it is very hard to see a supportive monetary one. The IMF in their October World Economic Outlook also put a similar figure of 2.7%, while the EU commission in November 2007 came in with the same 2.6% as the OECD.

Perhaps the prize for the most exaggerated prediction here must go to GKI Gazdaságkutató Zrt, who argue that Hungary should expect the incredible annual growth rate of 3.5%. My own view is much more nuanced. I think I am reasonably confident in holding to my recession forecast for 2008, although of course, "recession" does not mean negative growth for the whole year (technically it is simply 2 consecutive quarters of negative growth), so we might then go on to see what, between 0.5 and 1% growth over whole year 2008 (and the only really doubt is whether the contraction starts in Q4 2007, or in Q1 2008). But it is what happens in 2009 and 2010 that matters really, and at this point so many variables are in play (and interrelated ones to boot) that I can only say I envy those who have the courage - or the temerity - to stick their necks out). And of course, if we get a large correction in the value of the forint, then all those carefully weighed and weighted forecasts will, without a shadow of a doubt, go straight and directly off into the bin.