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Saturday, June 07, 2008

Hungary GDP Q1 2008 Detailed Results

Hungary's gross domestic product grew by 1.7% year on year in the first quarter of 2008, according to unadjusted data. However this figure when adjusted for calendar impacts (2008 was a leapyear) was a 0.9% increase over Q1 2007. The revised data are the same as the preliminary numbers. The engine of growth remained industrial output and in particular the improvement in the trade balance as a result of the strong increase in exports and the slower increase in imports (where weaknesses in domestic demand continued to weigh).

Adjusted year on year GDP growth was thus up moderately to 0.9% in Q1 from 0.7% in Q4 2007. Quarterl on quarter growth edged up to 0.3% from 0.1%. The moderate pick-up is attributable to a leap in agricultural performance and a slight improvement in the external trade position.

The position is very clear in the above chart I think. On the back of the fiscal adjustment package which was introduced in the summer of 2006 Hungary's economic growth plummeted and since hitting the bottom in Q1 2007 has continued to languish in the 1% per annum growth region. Given that internal demand conditions are unlikely to change substantially for the better, while the external environment on which Hungary's exports depend may well worsen (though agriculture could give some plus impetus if the harvest is as good as people are saying) it is hard to see headline growth moving up much out of this zone and the unadjusted 1.7% number should be regarded (at this point at least) as something of a "freak" reading.

The structure of Hungarian growth has however changed enormously, and that I think is what many commentators are missing. In a pattern we have already seen in other ageing societies like Japan, Germany and Italy, internal consumption seems to have "maxed out" according to my estimates in the second half of 2002 (see chart below, where the difference between "private" and "total" household consumption is simply that the latter includes government transfers, which have of course been affected by the adjustment programme hence the more rapid decline).

It is my interpretation of the situation that the increase in government fiscal deficit in 2005 and 2006 was in fact a knock on consequence of this decline in private consumption in an attempt to maintain the momentum which was being lost.

Investments in the Hungarian economy were down by 4.8% year on year in the first quarter of 2008. The volume of investment – according to seasonally adjusted indices – was 1% lower than in the previous quarter. Construction investments fell by 15.5%, while investments in machines and equipment were up by 8.4%.

After the impact of last years drought, the agricultural sector is now growing again (and in particular given the rapid rise in food prices).Since this sector is highly volatile it can have substantial impacts on short term GDP growth rates despite its small weight in the whole economy - last year it brought the headline data down and this year it may well pump it up. Most analysts expect a good harvest this year, but this is precisely why Q1 growth estimates are a little uncertain, since the real value of current operations will not be known before the middle of the year. For this reason, the current data may even be revised upward if crops prove to be as good as is being forecast this year.

So if there is a stable external environoment (in the eurozone) - something which is open to question - we could expect a slight pick-up in GDP growth during the year on the back of agricultural output and continuing exports, but it seems right now there is no spectacular change of pace in sight. Any economic recovery is going to be ``slow'' (especially given the inflation problem, and the very tight monetary policy being run by the NBH) and household consumption and investments are unlikely to improve dramtiaclly, and certainly cannot be expected to replace exports as the growth engine (as central bank President Andras Simor recently suggested) and investment will be very much driven by the export sector much as we have been seeing in Germany in recent years. The chart for total domestic use (which is the sum of private and public consumption demand and capital formation - or if you prefer investment) makes this abundantly clear. Without the improvement in the trade balance there is no growth whatsoever in Hungary at the present time. I think this is quite an important result, and one which people need to think about a lot, since if this is not understood none of the 1001 "remedies" are ever going to work. Hungary is an "elderly" society with a declining and ageing population, and the macroeconomic consequences of this need to be assimilated and understood.

Of course, we have strong downside risks on this scenario, since any deterioration in Germany, or increase in global risk aversion can unsettle a Hungarian economy which continues to remain precariously perched between heading up and heading down.

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