Hungary Q2 2007 Revision , Is Recession Near?

The Hungarian economy grew in the second quarter at the slowest annual pace in more than a decade following the introduction late last year of a strong austerity programme which involved the government cutting public jobs and raising taxes, with a consequent strong knock on effect on consumer spending and investment. The statistics office today revised downwards the second-quarter 2007 GDP growth figure today from 1.4 percent reported earlier. This means - at 0.1% growth in the second quarter itself - the Hungarian economy is now in effective zero growth mode, and the outlook entering the second half of the year seems set for negative growth.

Hungary's year on year growth rate fell in the second-quarter economic growth to 1.2 percent, the slowest pace among the European Union's eastern members. It compares with 2.7 percent in the previous three-month period, the statistics office said today. Here are the relevant charts:






The engine of growth continued to be the industrial sector with 7.8% yr/yr growth, which was largely driven by a 14.6% increase in export demand. Household consumption fell 3.3 percent, after declining 0.8 percent in the first quarter. Government consumption was 2.8 percent lower. Gross fixed capital formation rose 0.8 percent.

The decrease in the services provided by the government sector took its toll as public consumption declined significantly as a consequence of the austerity measures.

Despite the slowing growth the central bank will have a hard time taking any decision to cut the benchmark interest rate from 7.75 percent for a second time this year in the current financial environment given the dependence of so much private debt in Hungary of foreign currency denominated credit and the impact rate reductions may have on the value of the forint. Rate setters will next meet to decide about any possible rate change on Sept. 24

Industrial Output and Exports July 2007

According to the KSH preliminary release Hungary's industrial output was up again in July, which is obviously good news. Let's look at the deails. Firstly the working day adjusted volume index for industrial production.



So industrial output has turned upwards since May, and as I say, this is obviously good news. There is a lot of speculation that this is due to an upturn in exports, and this explanation seems to be a logical one, since domestic demand is basically in decline. However, as can be seen from the chart below which tracks month by month changes in output, the rate of increase in July slowed from the very strong rate achieved in June, so we need to watch carefully what happens next. This being said the position is a lot better than might have been feared. The issue will be to maintain this expansion in the export sector going into the autumn.




Now in order to interpret this data we need to examine the detailed report on industrial output when it becomes available, and the July trade figures, a preliminary version of which have today been made available by the statistics office. We also need to be aware that this data is from July, and we still do not know at this stage to what extent Hungary's main external customers are themselves slowing down following the recent financial turmoil, but this vulnerability is of course the price you pay for export dependence.

Now, according to the KSH:

During January-July 2007, the value of exports was HUF 9,603 billion, while that of imports totalled up to HUF 9,763 billion. The value of the exports is estimated to have expanded by 12 percent, while that of imports by 9 as compared to the corresponding period of 2006. In euro terms, exports grew by 18, imports by 14 percent. The trade deficit reached HUF 160 billion (EUR 639 million), which is less by HUF 256 billion (by EUR 958 million) than in the same period of the previous year.

So let's look at some charts. Firstly lets look at the year on year annual monthly changes in exports and imports:



Now the first thing that needs to be said is that while these results are obviously positive, they are nothing to start dancing up and down in glee about. July was a positive month, but not as good as June, and most of the improvement in the trade balance comes - as was to be expected - from a very slow rate of increase in imports. This becomes clearer if we look at the evolution of absolute values.



What we can see here is that the level of both exports and imports actually fell in July in comparison with June, so it is not clear that this data can explain the industrial output data, and if we take into account the very weak new order showing that Hungary registered in August as released by Eurostat I think we need to proceed with caution. It is also interesting to note the way in which imports have seemed to track exports in recent months, to get a real export lead recovery we should look for the export curve to break loose in an upward direction.

This is doubly the case if we look at a breakdown of where the exports actually go. Germany is the biggest single customer, accounting for 29,85% of the toatl in the January - June 2007 period (and a y-o-y rate of increase of 17,8%). The EU12 also take a big chunk between them - 18.7% of the total (and a massive y-o-y rate of increase in the Jan - June period). Now both of these areas must be viewed as having strong downside risk in H2 2007. Germany is obviously slowing already, and may even have a recession in the winter, the EU12 have been overheating considerably as a group (obviously this isn't the Hungarian case) and are generally slowing. So the current comparatively strong export showing has to be viewed with considerable caution. The inability of the Bank of Hungary to lower rates due to the domestic problem of Swiss Franc mortgages, and the resulting comparatively high value of the forint must be the main downside element in trying to push up export shares in n increasingly unfavourable environment, although - as I keep hammering - a drop in the value of the forint would be very bad news on the domestic demand front, indeed rather than simply bad news I would say disastrous news. But what will be will be. Watch this space.

Hungary July 2007 Producer Prices

This report is now a little dated but still, I think it is interesting to put the industrial output numbers in some kind of perspective, and especially the export component. According to KSH, Hungary's industrial producer prices were down by 2.8% year in July 2007 year on year. Export prices were up 0.6% m/m despite a stronger exchange rate in July, while the increase in the price index in domestic sales moderated to 0.1% m/m from 0.3% in June.
Obviously the downward trend in domestic producer prices mirrors the weakening in domestic demand, and this offers support to the disinflation process. Prices of domestic food processing industry sales showed the only outstanding price increase (0.8% m-o-m), while prices in other major manufacturing remained flat.

Prices for export sales still reflect a significant process of deflation, with the y-o-y data showing a drop of 9.9%. The m-o-m figure however is already reflecting the recent HUF weakening, and showed a 0.6% rise, the highest for more than year.

The consumer good component of the PPI - which to some extent correlates with the CPI number dropped y-o-y to 3.7%, but the m-o-m figure was 0.6%, which could constitute a warning signal - especially on the back of June's 0.4% - that the near-zero m-o-m rates achieved during the first five months of the year are now over.


Domestic price inflation for food products was 7.1% yr/yr, which was down from the 7.5% June number and the 7.6% May one, hence the short term CPI outlook may be holding steady.

Here is the chart for m-o-m changes in domestic sales prices and export prices:



and below are the year on year changes.What we can observe is that there is now a very strong disinflationary process at work.