Have Hungarian Retail Sales Now Passed Their Historic "Peak"?

Hungarian retail sales fell again in June - by 0.3% month on month - following a 0.2% drop in June, according to data adjusted for calendar and seasonal effects supplied this week by the Central Statistics Office (KSH). What many observers seem to fail to be taking note of is that this now means that Hungarian retail sales have now been dropping steadily since they reached a historic high in August 2006. Even more importantly - as will be argued in this post - there are important theoretical grounds (in the context of Hungary's declining and ageing population) for postulating that the 2006 high may NEVER be hit again, and this is the point most of the consensus analysts who are predicting a "rebound" in domestic consumption fail to take into account. Of course at some point (although not in the immediate future) we may see the long predicted rebound, but the secular trend now seems well established, and I see no good economic arguments which would lead us to think it will reverse. Wishful thinking is, of course, another matter entirely.

According to working day and seasonally adjusted data retail sales fell by 1.9% year on year in June, as compared with the 1.6% rate of decline in May.

But this trend is now long term. Retail sales in 2007 declined by 2.9% in annual terms, which compared with an annual increase of 4.4% in 2006 and 5.6% in 2005. It is hard to give an exact estimate for 2008 at this point, but between January and June the KSH registered a 2.2% year on year decline. The Q2 decrease was 1.7% yr/yr, following a 2.9% drop in Q1, but the data are very distorted this year by the calendar effect of Easter, so a 2% drop on the year seems to be a realistic guess at this point.




Sales of cars, car parts and fuel totalled HUF 205.1 billion in June, down 3.0% yr/yr against a decrease of 1.0% in May, while retail sale of cars and car parts alone plunged 6.2% yr/yr in June, following a decline of 1.3% in May. Fuel sales were up by 0.5% yr/yr in June, up from a fall of 0.8% in May. Over the Jan-June period there was a 0.1%year on year increase.

"Peak" Retail Sales

So the question we are faced with now, is whether or not we are faced with "peak" retail sales, with the index having hit a ceiling in 2006? The level of 137.5 I have put into the annual index for 2008 is a conservative one, given that the index for H1 was 137.6 and the trend is down.

The theoretical basis for this assumption is on reasonably solid ground, and there is evidence to show the phenomenon exists in other ageing economies. In Italy, for example:




Now Italy's population is not in fact contracting at this point, although the natural population change is negative, and has been for some years. But Italy has immigrants, and thus the population is still increasing (For a fuller discussion of the situation in Italy, see this post here). This is NOT Hungary's case.


Germany provides us with another case where retail sales clearly seem to have peaked. In this case the peak (which seems to have been in 2006) is all the more striking since unemployment has been falling strongly in Germany over the last two years, and up till very recently the country was cleary enjoying an economic boom.



(Note, the index reading for 2008 which is included in the chart is an estimate - and probably a conservative one, since sales are still falling - based on the first six moths of the year).



But as well as falling, Hungary's population is also ageing, and we know from basic life cycle theory (Modigliani) that saving and spending patterns change across the life cycle, with the propensity to borrow against future income to buy now declining significantly after 50, and since it is increasing consumer credit that drives retail sales growth in the dyamic internal consumption economies, then it is highly likely that ageing will now act as a drag on sales growth. As we can see in the chart below, Hungary's median population age has been rising steadily, but the rate of ageing is now about to accelerate quite sharply, with the only real substantial unknown between now and 2020 being life expectancy, which may accelerate more than anticipated (in which case the population ageing will be even more rapid).




Conclusion: It's All About Exports Now

Apart from retail sales, another indicator of domestic demand which is worth thinking about is housing construction. Let's look at the chart.



As we can see the number of new buildings peaked in 2004. Since that point the sector has struggled. Obviously the absence of new households can be offset to some extent by holiday homes, but this has limits, and in the present credit crunch environment is unlikely to be as important as many anticipated. Despite the general economic slowdown there was a rebound in housing activity in 2007, but in the wake of the US financial turmoil of August 2007 this now seems to have faded. It will be many a long year (if ever) before we see construction on the 2004 scale in Hungary again, since housing is, above all, about demographics.

So what does all this mean for Hungary? Should people simply pack their bags and leave. No, not at all. What it means is that it is all about exports now, as far as the Hungarian economy goes, and the sooner Hungarian civil society (together with the civic institutions - parliament, central bank etc) faces up to this, the better.

Given the rapid ageing that Hungary is now faced with, and the need to maintain a health and pension system with some kind of minimum guarantees, then economic growth is essential, and the only way to get this economic growth is through the export sector, and this is now a hard fact of life. Indeed it is precisely because the structural commitments to current expenditure are so large in the Hungarian case, that the downturn in public sector construction has been so strong following the austerity package. The sooner everyone faces up to all of this the better.

Hungarian Producer Price Growth Moderates Slightly In July

Hungary's overall producer prices dropped 0.7% month on month in July, following a 0.5% decline in June, according to data from the Central Statistics Office (KSH) last Friday. The year on year rate dropped to 3.7% from 4.6% in the previous month.

Domestic producer price inflation was however up at 13.3% year on year in July (following a 12.1% rise in June) and in monthly terms domestic prices were up by 1.2%, following a 0.7% rise in June.

In contrast, export sales prices dropped in July by 3.4% year on year following a 0.8% annual decline in June. Month on month export prices dropped 2.1%, following a 1.4% drop in June.



The acceleration in domestic sales prices was largely driven by the energy sectors (oil processing, electricity, gas and water supply), which suggests that a significant part of these energy price increases will find their way into the CPI in the coming months, slowing down the disinflation process.

There was a 0.1% month on month drop in food processing prices, which suggests that the sharp correction in non-processed food prices during the summer months is likely to limit the rate of increase in processed food prices, which may offset the effect of energy price rises in the CPI to some extent.

The shadow of the strong forint obviously lingers over the current PPI figures, and especially the export component, since the direct impact of the forint is immediate and the change from June to July was quite steep.

Meanwhile the domestic prices component, which is in fact far more telling about the underlying domestic inflationary pressures, edged higher, and the 13.3% year on year is not good news at all for the CPI as we forward.

Hungary Household Lending Growth Slows In July 2008

Loans granted to the household sector fell in July - by HUF 36.1 billion to HUF 6,320.8 billion. Forint denominated loans were up by HUF 2.7 billion, while foreign currency loans fell by HUF 38.8 billion to HUF 3,703.7 billion. Exchange rate valuation effects reduced the value of foreign currency loans by HUF 156.2 billion (debt to banks are reduced in HUF terms due to the strengthening of the forint) while new transactions increased it by HUF 117.5 billion, central bank data showed.


Of total household loans 58.6% forex were 41.4% forint denominated.

The share of housing loans dropped fractionally from 51.8% to 51.7%, while the value of housing loans fell by HUF 23.9 billion. Foreign currency loans remained unchanged at 51.3% as a percentage of total outstanding housing loans.



Deposits with monetary financial institutions on the other hand were up by HUF 28.5 billion and reached HUF 6,377.9 billion. Forint denominated deposits dropped HUF 14.9 billion and foreign currency deposits rose by HUF 43.7 billion compared with June. Exchange rate changes and transactions, respectively, accounted for HUF 23.4 billion and HUF 67.1 billion for the change in the stock of foreign currency deposits.


Leaving aside the currency valuation effect, it is clear that the rate of increase in private credit expansion has slowed considerably. If we look at the chart for forex mortgage loans for consumption purposes, the level of these has been virtually stationary since January, after a twelve month period when they virtually doubled.




If we look at forex mortgage lending generally we see a similar picture, even if the rate of increase in 2007 was nothing like as rapid as in the case of consumption directed loans.





Again, if we look at total mortgage lending, it is obvious that there is more than forint valuation effects at work here. It seems to me there are signs of the impact of the credit crunch, whether this be due to tighter liquidity conditions on the banking side, or due to the pressure of interest rates on the consumer demand side.



The situation is of course reflected at the level of construction permits for new dwellings, which stood at 3,710 in Q1 2008 (down from 4,105 in Q1 2007) and 4,936 in Q2 (down from 5,318 in Q2 2007). And again more support is offered for the gradual credit crunch view from this statement in the last KSH report on building permits:

Holiday houses’ new constructions have shifted to the opposite direction as the building permits. Building permits’ number is by 26% higher, while that of newly built holiday houses by 30% less than last year. In the first half of 2008, 650 holiday units got building permits and only 200 units were built, with the average size of 66sqm.

That is, there are more people with permission to build, but less of them - for some reason - are building.