Real wages have, after a substantial period of wage deflation, have now started to rise again, and were up by 2.3% year on year in April. The problem is that if real wages stay in positive territory it is hard to see how inflation can come under control as what we have is a constant pass through of first round into second round effects, while unfortunately the presence of high structural oil and food prices mean that in Europe - which is a net energy importer - living standards do have to fall somewhat in order to be able to pay the new prices without a constant and vicious spiral in inflation.
Increasing expectations that interest interests rates would be raised on the back of this data immediately sent the HUF shooting up, and within 5 minutes of the announcement it had strengthened from 244 to 241.6 against Euro.
Alongside the wages data the Central Statistics Office also published employment details. The average number of employees in businesses employing at least 5 people and in the state sector was 2 million 745 thousand in January–April 2008. Some 1 million 943 thousand of these worked in the private sector and 719 thousand in the public sector.
The number employed in the state sector decreased by nearly 5.3% year on year, but has been rising steadily from the trough of 710,000 in January, and in April stood at 729,000.
while in the private sector has remained more or less constant on the year, climbing back in recent months after a steady decline in the second half of 2007.
In a second wave of HUF buying after lunch the HUF rose against the Euro, rising from 242 to 240.30 in the space 30 minutes, which set a five-year end-of-May Forint-record.
On inter-bank markets Euro was worth 244 HUF this morning and 248 yesterday morning, and this means an3% rise in the HUF has taken place within 36 hours.
In another indication of the rising yield expectations which have been produced the Hungarian Government Debt Management Agency (AKK) offered 70 billion HUF-worth of three-year bonds for auction this morning, but investors only bid for 60 billion HUF worth, leaving the AKK only able to sell 50 billion. But not only were 20 billion less bonds sold than planned, the yield rocketed to 10.02%, up from 9.22 in May.
The average yield now exceeds yesterday's benchmark reference-yield for three-year bonds by 11 basis points. The yield on quotations accepted today ranged between 9.90% and 10.15%.
We have to go back to the summer of 2004 to find the last auction average yield for three-year bonds at over 10%, whilst to find fewer bids than there were today it is necessary to go back to December 2002.
2 comments:
Edward,
I have to wonder how much increases in wages reflect the continued whitening of Hungary's economy rather than increases in wages de re. In this case there is no necessary increase in demand, though perhaps a lessening of private comsumption as increases in declared wages are taxed.
Adrian
Hi Adrian,
"I have to wonder...."
Well that's just it. This is all we can really do on this topic, wonder and scratch our heads, since we have no real data.
Certainly this "whitening" process does seem to have been taking place since the autumn of 2006. But you have to ask how much of it there was to whiten, in the sense that how much more can there be of it. Of course you are right about the economic implications for consumption.
I think the key point is that real wages were declining throughout 2007 (and of course, if most of the rises at that stage were whitening then this decline was considerable, and really consumption only didn't fall further due to the substantial increase in CHF personal loans and refis). Since February however real wages have been rising in a way which is not justified by the general economic performance.
What we have seen is an uptick in economic activity, and a very slight labour market tightening.
Most of the action now shifts over to the central bank and monetary policy. The main stimulus which could be given to internal demand and domestic economic activity would come from getting interest rates down (given that fiscal policy is going to continue to be a growth negative), but with these sort of wage figures and the underlying inflation dynamic we are a long way from any moves in this direction, and the next move will probably be up.
Since the exchange rate of the forint is also a factor here, and relative yield vis a vis the ECB benchmark rate is possibly about to go up, this only makes it even more likely that the NBH will raise.
On the consumption issue in the longer term, I take the view that ageing and declining population related factors mean that domestic consumption is unlikely to become a growth driver, and Hungary is going to be exports driven. Things are improving on this front, and the recent Mercedes decision was obviously another step in the right direction.
But the bottom line is that we are unlikely to see "stellar" growth in Hungary anytime soon, and should there be a risk aversion generated run on the forint at any point then the risks that things become seriously complicated is not negligible.
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