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.

Hungary Producer Prices January 2008

Hungary's industrial producer prices were up 3.0% month on month in January following on the heels of a 0.4% rise in Dec 2007. The increase was 4.3% year on year in comparison with a 1.6% growth in December according to data released by the Central Statistics Office (KSH) yesterday.

Domestic sales prices were up vy 5.0% m/m and 10.8% y/y from 6.2% in December while export prices were up 1.5% m/m and still decreased (but only just) y/y at -0.5%. If we look at the chart below the upward tren in producer prices is clear enough. Most preocuppyingly the level of export prices is now feeling the attrition.




While we are still in negative territory year on year with the exports prices, unless there is a reversal of the trend we are about to go positive as of next month. In fact, as you can see in the chart below, export prices have effectively been rising since April, and they are now up 3.3% since March.



Obviously, and unfortunately, we now look set to see more of this. The internal inflation process is now just too much for productivity gains to absorb. Of course global oil and food prices don't help any either, but the point at the end of the day is that with domestic demand in the condition it is, Hungary has no alternative but to export to grow, and with these relative price tendencies this would seem to be very hard work indeed.

Hungary Unemployment November to January

Hungary's 15 to 64 unemployment rate jumped to 8.2% year on year over the November 2007-January 2008 period, reaching a 10-year high, and up from 7.8% in Q4 over the October-December period, the Central Statistics Office (KSH) reported on Thursday. The KSH calculate three month moving averages. Given that the move from the previous 3 month average has been so significant, we can assume the move in January was equally so.



The number of registered unemployed in the January data was up to 342 thousand from the 327 thousand recorded in the previous month's data. Of course some increase in unemployment is normal at this time of year, but it is the comparison with the numbers from a year ago which you can see in the chart that is telling.




The current unemployment rate compares with the 7.5 percent level which existed a year-ago and is the highest since the first quarter of 1998, according to the statistics office. The number of Hungarians employed fell to 3.87 million from 3.94 million in the same period a year-ago period. 45 percent of those who are unemployed have now been unemployed for more than a year.

The KSH said the number of unemployed was 342,600 and the number of employed totalled 3,873,300 in the period examined. The latter figure compares with 3.909 m in Oct-Dec 2007 and 3.939 m in the same period of 2006/07. The number of unemployed rose by 14,800 from the previous 3-m period and was up by 25,100 from the reading in the same period of 2006/07.



The increase is largely due to both private and public sector lay offs (employment is DOWN 66,000 y/y) - even though the impact of this is not fully reflected in the unemployment rate as the economically active population also declined by 41,000 y/y signalling that many of those who lost jobs withdrew from the labour market, in many cases via early retirement schemes."

This drop in both the participation and activity rates is preoccupying, since with Hungary's population declining and ageing it is very necessary to put a significantly higher proportion of the available working age population to work to make the health and pension systems (even when reformed further) sustainable.