Hungarian Inflation Falls Back Slightly In June 2008

Hungary's inflation rate fell back slightly in June as food prices declined and the forint's strength checked increases in fuel costs. The decline raises the possibility that the central bank may keep its benchmark interest rate on hold at the next meeting.

Hungary's annual rate fell to 6.7 percent in June from 7 percent in may, according to data released by the National Statistics Office earlier today. Consumer prices rose 0.1 percent from May. Core inflation, which strips out food and energy costs, was 5.8 percent in the year and 0.4 percent month on month.




Food prices fell 0.4 percent month on month in June, led by a 9.9 percent decline in the cost of seasonal fruit and vegetables. Clothing products were 0.3 percent cheaper and the strengthening forint cut the cost of consumer durables by 0.2 percent. Fuel prices rose 0.8 percent.

Hungarian inflation has been faster than the Magyar Nemzeti Bank's 3 percent goal for 22 successive months now, leading the bank to raise the benchmark interest rate by a cumulative 1 percentage point since March to a three-year high of 8.5 percent. The bank now expects inflation to average 6.3 percent this year and 4.2 percent in 2009, with the rate falling to 3 percent some time in 2010, according to the latest forecasts, published on May 26.

Part of the explanation for the slowing inflation is also the rise in the forint (which makes imports cheaper). The forint has been the world's best-performing currency over the past month, having gained 6.9 percent against the euro. It touched a record 229.64 on July 9 and was at 231.57 at 10:36 a.m. this morning in Budapest from 231.23 late yesterday.

The downside of the strong forint and high interest rates is, of course, going to be felt on the economic growth front, since Hungary is now and export driven economy. Industrial output dropped by 0.7% month on month in May, according to seasonally and by working day adjusted numbers, as compared with a 1.4% month on month rise in April over March.

The drop in IP was almost certainly a result of the export situation since Hungarian exports actually FELL on a month on month basis in May. They fell from 1673.4 billion HUF in April to 1513,3 Billion HUF in May. That's about a 7% drop m-o-m. For an export driven economy with weak domestic demand and reducing government expenditure, this is pretty well-nigh a disastrous reading. It also puts all the recent speculation about how "high" the forint can rise into some sort of more realistic perspective.

Hungary's Industrial Production

Hungary's industrial output rose by 2.2% year on year in May, according to unadjusted data and was up by 4.7% year on year, on a working days adjusted basis, according to preliminary data from the Central Statistics Office (KSH) yesterday. Following last month's 11.8% (uncorrected) and 6.5% (wd adjusted) increase this is a marked slowdown.



Output dropped by 0.7% month on month in May, according to figures adjusted seasonally and by working days, versus a 1.4% pickup in April.

This data would suggest that Hungarian export growth is slowing, and it is, since exports dropped month on month in May. How much of the slowing is to forint appreciation and how much to growth slowdowns in the eurozone also remains to be seen.

Hungary External Trade April 2008 (Detailed)

Hungary's statistics office (KSH) this morning confirmed that Hungary had a trade surplus in April for a third consecutive month as the government austerity programme and monetary tightening at the NBH continued to damp domestic consumer demand, curbing imports.

The surplus was 64.1 million euros ($100.8 million) compared with 198.9 million euros in March and a deficit of 155.4 million euros in April last year, the Budapest-based statistics office today. The April figure was revised from a preliminary estimate of 54.2 million euros (see blow).

Hungary's trade deficit has now been shrinking for two years as exports have gathered strength while government measures to cut the budget deficit, which was previously the widest in the European Union, and higher interest rates from the NBH have crimped consumer demand for imports.

According to the revised figures, exports rose 22.8 percent in April from a year earlier, the fastest rate in nine months, while imports increased 18.1 percent (% in euro terms). Seventy-seven percent of exports went to the European Union while 68 percent of imports came from EU countries.



Preliminary

Hungary posted another trade surplus (EUR 54.2 million) in April, according to first estimate figures released by the Central Statistics Office (KSH) on Friday. The figure compares with a surplus of EUR 198.9 million in March and a deficit of EUR 155.4 m in April 2007. This data simply underlines the significant tutnaround which has taken place in the Hungarian external trade position over the last 12 months.

Exports in April 2008 came to a total of EUR 6,429.4 m, up by 22.8% year on year, which compares with a growth of 4.2% in March (although we need to be careful here since March was an unusual month due to the timing of easter, and March /April are better taken together). Imports were EUR 6,375.1 m, 18.2% up on April 2007. In March year on year import growth was down to 2.9%.




The January-April balance (which is a much better indicator of where we are) showed a EUR 330.6 million surplus, which compares with a deficit of EUR 307.2 m in the same period of 2007. Exports were up 15.2% (in euro values) in January-April 2008 over January-April 2007. In the same period imports were only up by 12.1% hence the improvement in the trade balance.



Hungary sent 78% of its exports to the European Union and imported 69% of its goods from the EU in April.

The gap between export and import growth rose to 4.6 percentage points in April, up from 1.3 percentage points in March.