Facebook Blogging

Edward Hugh has a lively and enjoyable Facebook community where he publishes frequent breaking news economics links and short updates. If you would like to receive these updates on a regular basis and join the debate please invite Edward as a friend by clicking the Facebook link at the top of the right sidebar.

Monday, July 30, 2007

Temporary Work on the Rise

This fact isn't especially surprising, given the domestic downturn and global trends in labour contracts, but still, Hungary’s State Employment Service (ÁFSz) says:

In 2002 only 30,000 employees found a job with a temporary contract, but this figure reached 102,000 people last year. The 102,000 were ‘rented’ 128,000 times. This type of employment is most typical for processing and trade companies. Last year 2,528 companies applied for help from temporary agencies, out of these, 1,022 are processing companies and 392 are trading companies. Firms requesting temp staff mostly offer blue-collar jobs for people who can be trained on the spot. 106,000 people were rented for blue-collar jobs and only 22,000 for white-collar jobs last year. The people participating in the temp scheme were employed for 168 days on average in 2006. Last year there were 710 temporary agencies operating in Hungary.

The Forint Again

Well the Forint seems to be taking a real bashing at the moment:

The Hungarian forint fell as a decline in central European stocks and persisting concern about U.S. mortgage-loan defaults spoiled investors' appetite for riskier assets.The forint was set to post the biggest drop against the euro among the four central European currencies, extending losses suffered last week, on speculation investment may dwindle as the government tackles the largest budget deficit in the region with an austerity package.

Being curious about the real magnitude of the change I knocked myself out some charts from Yahoo.

First off, let's look at the five day chart:

As we can see, there is no mistaking the steady downward trend. Now lets look at the latest 24 hour chart:

Again we can see, while there is considerable volatility, the downward trend is being maintained. Now let's look at the three month chart:

As we can see, in only the last week a considerable fraction of the way back to the June 2006 lows has been covered. This is worrying, and we had better hope the US sub-prime and other stories which are unsettling emerging markets at the moment calm down. Incidentally, I don't buy the Turkish Lira story that portfolio hungary are selling. Turkey's underlying economic fundamentals are reasonably sound right now, especially after the elections: I wish I could say the same for Hungary's. Hungary is very vulnerable in the event of any sustained emerging market risk aversion, and this becomes doubly the case since this drop in the Forint will make it even more difficult for the NBH to lower rates.

Climatic Change, Bioethanol and Food Prices

This article in Portfolio Hungary is interesting:

A likely damage in crop volumes induced by extremely hot weather and draught in Hungary will probably aggravate the situation in the food industry now that price hikes also seem to be hanging in the air. The rise of food prices, together with rising petrol prices, may cause some serious inflation pressure, Societe General has warned on Friday.

Now this article, which is basically about how food price inflation may interfere with the National Bank of Hungary's plans for monetary easing put me in mind of two things:

In the first place Daniel Antal has been complaining about the heat in Budapest. So are we seeing an already present on-cost to global warming? Certainly Serhan Cevik over at Morgan Stanley seems to think so. In an article on inflation in the Turkish economy, entitled appropriately enough "heat wave",and wriiten back in June he made the following point:

Weather anomalies present a threat as challenging as liquidity-driven capital flows
. Nothing seems to bring an end to the Istan-bull’s breathtaking run, pushing the Turkish lira to its strongest level in years, thanks to the lure of carry trades and strong economic fundamentals. In turn, the lira’s strength may have accelerated disinflation, even against strong inertia in certain sectors. On our estimates, consumer price inflation will decline from 9.2% in May to 8.8% at the end of this month. However, with higher energy quotes, weather anomalies present a challenge through the volatility of food prices. Surface temperatures in Turkey have already been 4˚C above the seasonal pattern, while average rainfall is running about 60% below the long-term mean. These dramatic changes in climatic conditions are not just specific to Turkey, but reflect a global phenomenon.

He then went on to explain how he felt all of this was having an impact on the Turkish economy and the inflation problem they have there:

Global warming is not just about warmer weather, but also — more importantly — leads to unpredictable changes in variability patterns. One of the immediate consequences of extreme weather conditions is droughts with greater severity that cause agricultural supply shocks and higher volatility in food prices (see Stay Tuned to the Weather Channel, August 4, 2006). And we may now be observing such an event on a global scale, as the ratio of stocks to consumption dropped to its lowest reading on record, leading to a sustained increase in food prices. Indeed, virtually every country around the world has experienced a surge in food prices and consequently pressures on headline inflation rates. This is a significant risk, especially for developing countries where food has a greater weight in consumer price indices. In Turkey, for example, food prices account for 28.5% of the CPI and thereby can turn into a major source of volatility. Over the last couple of years, food price inflation declined from 12% at the beginning of 2004 to 4.9% at the end of 2005, but then surged to 14.6% earlier this year. Although the year-on-year rate of change in food prices eased to 10.6% last month, meteorological data still point to a volatile outlook for (unprocessed) food prices.

Then secondly, this whole argument also put me in mind of something I had seen in the Financial Times a couple of weeks ago about how the increasing demand for biofuels was consuming agricultural land rapidly, and hence driving up - indirectly - food costs (again, there would seem to be no free lunches on offer here):

Surge in biofuels pushes up food prices

A surge in the production of biofuels derived from corn, wheat and soyabeans is helping to push up food prices so sharply that the World Food Programme, the United Nation’s agency in charge of fighting famine, is finding it difficult to feed as many hungry people as it has in the past....Food commodity prices are surging because of a number of factors including rising demand from China and bad weather, but the potential consequences of the rising demand for biofuels has caught the attention of those in the business of feeding the world. Mark Spelman, head of Accenture’s global energy practice, said the biofuel industry was at risk of creating a public backlash similar to wind power generation as food inflation continues.

The BBC also had a similar story:

Several other biofuel plants are planned in the UK but biofuels are already big business in the United States, where bioethanol is seen as a greener and more sustainable alternative to traditional petrol.The downside is that land which until recently was growing crops for food is now growing crops for fuel.The United Nations says a third of the total US maize crop went for ethanol last year.The International Monetary Fund say there's no question that demand for biofuels is driving up food prices - and that it will go on doing so - though in the UK the National Farmers Union disputes that.

So back to Hungary, and food prices. According to Portfolio Hungary:

The price of wheat, bread and milk may increase significantly, up to 15-30% this year and the National Fruit and Vegetable Council expect that watermelon turnover will be reduced by 30-40%.

Daily egg production in the current heat is way smaller than usual, which may lead to even a 40% increase in egg prices. This can filter down to CPI through a number of channels.

“Maize harvest may be reduced by 40% or more from 8 million last year to 4-5 million tones until the end of 2007. The number is chilling, as 4 million is needed to feed animals alone, not to mention food production or industrial purposes," the analyst added.

Meanwhile, new bio-ethanol projects demanding hundreds of thousands of tonnes of maize are being unveiled week by week in Hungary. While only a few months ago the country was still struggling to deal with millions of tonnes of surplus maize, it is now facing a possible shortage of animal feed due to a drought.

Some experts, however, warn that the expansion of the bio-ethanol sector will be slower than expected, simply because investors will not find enough grain inputs. The draught may cause expansion-driven bio-ethanol plants to cover their input need from imports.

The announcement on new bio-ethanol projects “cannot be taken seriously", as they are “just to reserve a niche in the market", Imre Németh, state secretary at the Prime Minister's Office told Reuters earlier this week.

Hungary's bio-ethanol production capacity is expected to rise to 400,000-500,000 tonnes by the end of the decade and rise to 800,000 tonnes by about 2013, Németh added. The Agricultural Ministry said earlier this year that the 800,000-tonne output could be reached by 2009 or 2010.

Saturday, July 28, 2007

Hungary April-June Employment

Well the Statistical Office have the latest employment numbers (April-June 2007) out. Really, on the surface, there would appear to be no change:

Hungary's rate of unemployment dropped further to 7.0% year on year in the April-June period, from 7.3% in the previous three-month period and 7.5% in Feb-April 2007.

This level is the lowest in 2.5 years. Also:

"the number of unemployed was 296,900 and the number of employed totalled 3.943 million in April-June. The latter figure compares with 3.92 m in Mar-May. The number of unemployed dropped by 10,800 from the previous 3-m period and by 8,800 from the April-June period in 2006."

As can also be read off from the chart below, the most striking thing here is that the number of employed people is more or less stationary. In principle, given the weakening taking place in the economy this is good news, but it is also the measure of a historic lost opportunity, as global conditions being expressed across the rest of the EU8 are leading to rapid employment growth (and of course overheating). One thing the Hungarian economy isn't going to do in the coming months is "overheat" (despite the temperatures Daniel has been noting), au contraire, under-heating and the rapid arrival of an early winter are more the problem to hand.

Looking at the next chart (all courtesy of the KSH), the general recent evolution in economic activity is clear enough to see, and the evolution is not an especially good one.

Forint Down on the Week

The Hungarian forint was the worst performer against the euro last week - falling by 2% - this was its biggest weekly drop in 10 months. I don't have a lot more to say about this at this point, or perhaps it is more prudent to say nothing. We await next week to see what happens.

The forint was the worst performer against the euro over the past five days, sliding more than 2 percent, as the NTX Index of stocks in central Europe's 30 largest companies declined the most in a week since March. Investors reversed trades where they'd bought the forint to take advantage of Hungary's 7.75 percent interest rate, also sending the currency tumbling.

``The sell-off does not seem likely to stop soon; I think central and eastern European currencies may fall further,'' said Agata Urbanska, European emerging markets economist at ING Bank NV in London.

Against the euro, the forint dropped to 252.07 by 4 p.m. in Budapest, after earlier touching a more than six-week low of 253.82, from 246.06 a week ago. Urbanska predicted Hungary's currency could weaken to 256 per euro.

The currency also posted its biggest weekly drop this year versus the dollar, to 184.550 from 177.962 July 20.

Of course you could take the view that the National Bank of Hungary were very perspicacious in not lowering rates earlier in the week - not precipitating a stampede, etc - but equally they were simply being cautious. Either way, in the short term well done, although this still leaves the issue of what to do about lack of export competitiveness and falling domestic demand to think about. This is the whole point about Krugman's old eternal triangle idea.

"The essence of the dilemma may be understood by remembering the catechism first suggested by the Bellagio Group, the famous official-academic international talk shop that flourished in the 1960s. In the world according to Bellagio, the problem of choosing an international monetary regime could be summarized as the effort to achieve Adjustment, Confidence, and Liquidity. Exactly what these terms mean is somewhat in the eye of the beholder; but my version goes as follows. Adjustment means the ability to pursue macroeconomic stabilization policies - to fight the business cycle. Confidence means the ability to protect exchange rates from destabilizing speculation, including currency crises. Liquidity basically means short-term capital mobility, both to finance trade and to allow temporary trade imbalances. So what is the dilemma of international financial architecture? It is that, essentially because of the threat of currency speculation, you can't get everything you want. More specifically, insisting on having any one of the three desired attributes in an international regime forces the abandonment of one of the others. As a result, there is a limited menu of possible regimes - and each item on that menu is unsatisfactory in some important way."

Simply put, the dilema runs as follows:

"The current situation is unacceptable, and everyone knows that something has to give; but the policy ideas that the community of respectable opinion can allow itself to discuss are at best marginal, at worst irrelevant."

Thursday, July 26, 2007

Tax Revenue Up

according to Portfolio Hungary:

"Hungary's public sector revenues managed by APEH rose by nearly 19% in the first half of 2007, the tax authority has announced on Wednesday. Some two thirds of the HUF 635 billion increase came from traditionally key tax revenues, APEH President János Szikora told a press conference"

Obviously this is very good news, and shows that the fiscal deficit may be well on the way back under control. But then again, this isn't the main risk factor in Hungary right now.

On the details:

VAT revenues totalled HUF 1,665.8 bn, 14.3% more than in the base period. While this may seem an extraordinary result, we must note that the medium rate at this tax was raised by 5 percentage points.

Yes, and this explains some of the sharp drop in retail sales. Methinks that when all this is said and done people may need to take another look at the validity of the idea of loading fiscal corrections onto consumer expenditure taxes.

"Personal income tax (PIT) revenues amounted to HUF 801 bn in H1, a 6% growth from the same period of 2006. It is noteworthy that APEH received 140,000 more PIT declarations in the first half of 2007 than in H1 last year (4.362 m)."

Yes, and this is the very good news, associated with the 2whitening" effect that Daniel Antal has been drawing attention to.

Forint Under Pressure

It's very difficult to say what is going on out there at the moment, all we can say is that there is some very choppy water following the unsettling effect of the US sub prime mortgages debacle.

Bloomberg has a piece on the Forint:

The Hungarian forint tumbled to the lowest in more than five weeks as declines in global stocks and concern about U.S. subprime-mortgage losses prompted investors to sell emerging-market assets.

The forint was the third worst-performer of 26 emerging- market currencies tracked by Bloomberg, falling with the Polish zloty and the Slovak koruna. The NTX Index of stocks in 30 of the region's companies fell 2.1 percent.

``The currencies in the region are falling due to a sell-off in equities and worries about the subprime loans,'' said Lucy Bethell, currency strategist at Royal Bank of Scotland in London. ``We may not see a rapid recovery but rather some further pressure in the nearest days.''

The forint fell as low as 251.19 against the euro, its lowest level since June 18, and traded at 250.96 by 5:42 p.m. in Budapest.

Now it is important here to remain calm, today we have choppy water, and tomorrow the seas may be all serene again, but just in case they aren't we need to watch very carefully what exactly is happening.

The Dow Jones fell significantly today, people in the US are definitely very nervous about what is going on in the property market.

The Financial Times ran this today:

Financing for the Chrysler and Alliance Boots buy-outs – two of the biggest private equity deals in the global markets – ran into serious difficulties on Wednesday, intensifying fears about the possibility of a credit crunch.

and this:

The gloom in the credit markets intensified on Wednesday as Chrysler postponed a $12bn loan deal and banks failed to sell £5bn ($10.2bn) of senior loans to fund the leveraged buy-out of Alliance Boots.

Bankers raising $20bn for the private equity buy-out of Chrysler Group from DaimleyChrysler were forced to postpone the sale of $12bn in loans for the car group.

Bankers still intend to raise a further $6bn in loans for Chrysler’s finance arm, albeit with higher interest rates but an additional $2bn loan for the financial company was cancelled last week......

Almost 30 bond or loan deals have been pulled since late June, according to Barings Asset Management, and until the market for corporate bonds shows signs of stabilising, the pipeline of deals threatens to give credit markets a serious case of heartburn.

The rapid withdrawal of liquidity has had a significant effect on market sentiment but it remains unclear whether it marks the start of a downturn in the corporate credit cycle. At this juncture, corporate defaults are at record lows and economic fundamentals remain sound.

Given that backdrop, some credit investors are starting to ask: when do we pile back in? “The market is starting to look attractive,”says Michael Kastner, portfolio manager at SterlingStamos, but he adds that “there is no rush to get involved at the moment”.

As the pipeline continues to bulge, Mr Kastner said: “It’s tough to step in and catch that falling knife.”

and this:

Private equity firms can now be in no doubt that they are going to have to pay more to fund the debt for buy-out deals they have already sealed.

This week alone has seen two of the biggest deals on either side of the Atlantic – buy-outs of Alliance Boots and Chrysler – forced to increase the premium, or interest rates, on loans they are trying to sell. Bankers in a flurry other deals have had to act likewise.

n the US, investors have been avoiding buying riskier structures such as covenant-lite loans and so-called Pik-toggle loans and bonds – which allow companies to make interest payments in the form of new debt.

Among deals to face difficulties were Thomson Learning, which was forced to restructure the terms of bonds and loans for its leveraged buy-out, and US Foodservice’s $5.3bn bond and loan offering, which was initially downsized and later pulled.

Eric Tutterow, analyst at Fitch Ratings, said investors were now growing concerned that large bridge loans to companies whose deals are being restructured or cancelled could result in tightening credit conditions. For the six deals that have been cancelled since the beginning of June, analysts estimate that a total of nearly $13bn of debt could be held by the underwriters for the foreseeable future.

Too many of these so-called hung deals will quickly cut banks’ appetites for underwriting debt for new buy-outs. JPMorgan, Goldman Sachs, Citigroup, Bear Stearns and Morgan Stanley are on the hook for $22bn between them in Chrysler debt alone if they cannot shift it.

and there is this derivates loss news from Italy:

The Bank of Italy estimates Banca Italease SpA, the country's biggest leasing company, will lose 500 million euros ($686 million) on derivatives contracts opened with clients, according to the Milan-based company.

The company will present ``definitive figures on the losses on derivatives positions'' when it discloses first-half earnings, Italease said today in a stock exchange statement.

and from the IHT:

Italease used so-called mirror contracts to hedge its derivatives positions. For every derivative contract Italease sold to its clients, it took out an opposite position with investment banks, effectively preventing the lender from profiting or losing money on swings in interest rates. This strategy eliminated its market risk, but left the company exposed to the counterparty, or default, risk of its customers.

and then there is this in Bloomberg:

Stocks tumbled around the world and U.S. Treasuries rallied on concern higher borrowing costs will slow takeovers, spur debt defaults and curb earnings, prompting investors to flee riskier assets.

The Standard & Poor's 500 Index fell to its lowest in almost three months. The U.K.'s FTSE 100 slid 3.2 percent, the biggest drop since the current market rally started in March 2003. Benchmark stock indexes in Argentina, Brazil, Mexico, Turkey and Sweden dropped more than 3 percent.

``We're seeing a global repricing of risk as the cost of capital ratchets up,'' said Joseph Quinlan, chief market strategist at Bank of America's investment strategy group in New York. Bank of America's investment-management unit oversees about $566 billion. ``We're working our way through a period of angst and anxiety.''

and emerging market bonds generally are taking a beating:

Emerging-market bonds slid, pushing yields over U.S. Treasuries to the widest since September, as investors reduced holdings of riskier securities.

Developing nation debt has declined for five days as growing losses in so-called collateralized debt obligations backed by subprime mortgages triggers risk aversion. Argentine and Venezuelan bonds, among the riskiest in emerging markets, led losses.

``The declines are spilling out from the global story centered on CDOs and the subprime market,'' said Michael Atkin, head of sovereign research in Boston at Putnam Investments. ``It's not a story that has originated in emerging markets. We're trading in lock-step with the move in risky assets.''

The spread, or extra yield, on emerging-market bonds over U.S. Treasuries widened 21 basis points to 2.15 percentage points at 1:16 p.m. in New York, according to JPMorgan Chase & Co.'s EMBI Plus index.

Well this has been a long post if you have gotten this far. What does it all mean? Vey hard to say at this point. What we need to remember is that these kind of things can become self-fulfilling prophecies, if people believe credit is going to tighten, then it will tighten. But equally, a week from now it could all be over. Hard to say really. Volatility is certainly way up, so we could be building up for something, but then agaion we might not be. Just watch and wait time I think. But DO keep watching.

Tuesday, July 24, 2007

Retail Sales May

Well the latest retail sales news isn't exactly encouraging:

Hungarian retail sales dropped by 0.1% month on month in May, according to data adjusted for calendar and seasonal effects, the Central Statistics Office (KSH) has reported on Tuesday. This was the fifth consecutive month when the KSH detected a m/m decline, although this fall was smaller than the one in April (revised upward to -0.6% from -0.5%). Accordingly, the indicator gauging changes in the past 12 months has also dropped - it stood at -2.8% in May, which is the greatest fall detected in this decade.

Looking at the chart below it is clear that they have fallen consistently for the last five months for which we have data, and indeed apart from a spike in November-December they have been in sharp decline since last August.

This makes the NBH decision yesterday a little more surprising, since you would have thought they would want to do something to try to support domestic demand at this point. Most commentators are agreed that most of the inflation will drop out of the system in the autumn - especially since Hungary is now about to become the one new EU accession country where labour supply isn't a problem - and my only conclusion is that they must be worried about the value of the Forint and all those Swiss Franc mortgages, and not doing anything to make matters worse.

Classic textbook economics tells you that right now the best move for Hungary would be to devalue in an attempt to export its way out of trouble, and aggressively cut interest rates, while keeping a tight rein on government spending, but for one reason or another Hungary may just not be able to do this.

This is in danger of becoming a real tragedy, since this is obviously the moment of golden opportunity across Eastern Europe (as everyone else pushes up against capacity limits). But this situation will not last for ever, and again the biggest danger is a general correction with Hungary getting caught up in the mess.

We also need to keep a careful eye on the evolution of employment data. The total number of economically active people and employed people has been falling, and I have difficulty interpreting what this means. On the best account people could simple be "discouraged" and leaving the labour market. On the worst account some may be being attracted abroad by the general boom which is taking place. From this distance this is very hard to say.

The best case scenario I can see is that Hungary goes through an extended period of below par growth, just like Portugal from 2000 to date.

National Bank of Hungary Keeps Rates on Hold

Well, given the wages data we saw at the end of last week, yesterday's decision by the NBH is hardly surprising:

Members of the Hungarian Monetary Council have on Monday voted to keep rates on hold (actual outcome) and not to reduce the 7.75% base rate by 25 basis points, NBH Governor András Simor told a press conference after the policy meeting.

“The decision was rather unequivocal, but individual members did think a lot about which side to take," Simor said, reiterating that a breakdown of votes will not be revealed before the minutes of today's meeting is published on 17 August.

My feeling is that the NBH will be very cautious in lowering rates, more due to caution concerning the uncertain impact on the Forint than anything else. Headline inflation should drop considerably as we get into the autumn.

Wednesday, July 18, 2007

May Wages Data

Well, the May wages data are sounding off alarm signals all over the place, but I really can't understand why, in the sense that I don't know what else people were expecting. Anyway, the financial markets are forecasting rate cuts, and as a consequence the Forint has started to come under pressure. Again, none of this is especially surprising, since in many ways Hungarian monetary policy is essentially in a trap, and this has been evident for some time. The National Bank cannot lower rates either very far or very fast without bring the Forint tumbling down, and in doing so pushing dramatically up the debt service costs on all those Swiss Franc mortgages. The impact of this on consumption would doubtless more than undo any positive lift to consumption which could be obtained from lowering rates. So the Bank may try to lower, but it will be a really tricky operation, and I doubt they can go very far without running into problems.

Meanwhile domestic consumption looks set to follow its downward course, so things are likely to get worse rather than better on that front. Lets just hope things don't get too bad in the Baltics at the same time.

Now for the wages data:

The after-tax income of wage earners rose 1.3% in May year-on-year, which translates into a 6.6% decrease in real wages with the inflation rate taken into consideration. On the other hand, the nationwide headcount of the public sector has increased for the first time in several months.

In the meantime, gross wage growth - the single most important indicator impacting the country's inflation rate - hit a new high. Gross wages in the private sector were 12.4% higher than a year earlier, another all-time high ever since statistics exist for this indicator.

This seems really to be doubly bad news, since a 12.4% gross wage growth translated into a 1.3% after tax rise (due presumably to the taxation effect of the belt-tightening package) and this 1.3% rise becomes a 6.6% decrease when you take inflation into account. So real wages are falling, whilst nominal wages continue to rise rapidly (and these, of course, are what influence export competitiveness).

Bad news all round I'm afraid, and nothing here looks too promising, and especially when you look at the state of the domestic construction industry.

Construction Industry Development

The latest round of data coming out of Hungary, whilst it is still along way from being alarming, is certainly preoccupying. The construction data is a good case in point. Little encouragement at all can be drawn from the numbers we are seeing here:

The latest construction industry statistics in Hungary show a slight recovery after disastrous figures in April (-6.4%), with production up 3.5% month-on-month in May. Even so, the spring of 2007 was rather unsatisfactory on the whole, and future prospects are even more disappointing.

At least, the slightly improved May figures brought the 12-month index back into positive growth, with the workday-adjusted figure currently standing at 5.2%.

Building construction was the only sector within the industry with a positive growth figure in the first 5 months of the year, while all other construction activities stagnated. Unless the coming months bring an upsurge, the years of 2006 and 2007 will go down in history as one of the weakest two-year periods in the industry.

As mentioned above, the future outlook is not particularly promising. At the end of May, builders reported a 32.9% decline in the volume of orders compared with May 2006. Within these, orders for building construction fell 8.9%, whereas demand for other structures almost halved (-45%). The only indicator that could be interpreted as light at the end of the tunnel is that the volume of new contracts signed by construction companies in May was 15.9% higher than a year earlier. Unfortunately, this is simply due to the unusually low figure in May 2006 which serves as the basis for comparison.

Wednesday, July 11, 2007

June Inflation Up

Hungary's consumer prices rose 8.6% year on year in June according to data coming today from the Central Statistics Office (KSH).

In June 2007 consumer prices increased by 0.4% compared to the previous month and increased by 8.6% compared to June 2006. In the first six months of 2007 the average increase of prices was 8.6% compared to the corresponding period of year 2006. In June 2007 the core inflation was 105.9%, the constant tax rate index was 106.8% compared to June 2006. The Harmonized Consumer Price Index was 100.4% compared to the previous month and 108.5% compared to June 2006.

A number of points immediately become apparent. In the first place - and as can be seen from the graph below - the rise in headline inflation took place while food price inflation was reducing, which means that core elements are playing an increasing role, especially energy related products, which are at least partly experiencing the impact of withdrawing the subsidy.

Services rose by more than expected. This is important, as the key argument of the Monetary Council for its surprise June rate cut was that fast wage growth was not filtering throughto services prices with companies instead adjusting the size of their payroll. This argument is now much harder to sustain.

Also to be noted is the fact that the steady decline in the euro/forint value is making foreign travel more expensive. It will also, at some point, start making swiss franc mortgages harder to pay, and this will be the big one.

The thing is, as I was saying yesterday, the state of domestic demand now means that the National Bank need to cut rates aggressively, but at present the continuing inflation means they can't. And at the end of the day if cutting aggressively meant the forint tanked, then the impact would be thoroughly counterproductive. Tense and difficult days ahead at the National Bank of Hungary.

Tuesday, July 10, 2007

Trade Deficit Signals

Ok, the Hungarian Central Statistics Office (KSH)today published first estimate figures for the May 2007 trade deficit:

During January-May 2007, the value of exports was HUF 6,718 billion, while that of imports totalled up to HUF 6,848 billion. The value of the exports is estimated to have expanded by 13 percent, while that of imports by 11 as compared to the corresponding period of 2006. In euro terms, exports grew by 17, while imports by 14 percent. The trade deficit made up HUF 130 billion (EUR 520 million), which is less than that in the same period of the previous year by HUF 122 billion (by EUR 464 million)

Put another way the trade deficit is steadily improving, but the really important issue is the reason why. Now on the face of it things are improving, since the trade deficit isobviously trending down. This is clear from the following graph (even if the thing - which comes courtesy of KSH - is unfortunately upside-down really. A piece of advice, try and imagine it the other way up, then you can see that the deficit is in fact declining):

The real question, however, is why?

Well there are different explanations for such an effect at different moments in time (ie 2005/6 is not like 2007, since back then Hungary was booming). The MAIN reason for the current improvement is the drop in the rate of increase in imports, which is evidently associated with the declining trend in internal consumption (as indicated by the April retail sales data here).

The other big part of the picture is that the rate of increase in exports is SLOWING, as the next graph makes clear.

So this improvement is nothing like good news when looked at in the most general terms. The big problem is how the National Bank are going to be able to lower interest rates in the present environment without tanking the forint. If the forint were to lose value significantly then this would have what are know as "balance sheet effects" on private households (due to the large percentage of swiss franc denominated mortgages), effects which would then seriously curtail internal consumption. Another downside risk is represented by what is happening over in the Balkans, and in particular in Latvia. If the whole environment soured, then this would be really bad news for Hungary, and if the souring produced a general slowdown across the EU, then even maintaining that slowing rate of export increase might prove difficult.

Although I wouldn't want to put a probability rating on it, I do think that there is a possibility that things could deteriorate as we get into the autumn, and I have produced a little set of "balance sheet effects" primer notes which people might find handy to glance through. This debate, which has to some extent conveniently been forgotten since the late 1990s may well be about to resurrect itself.

Saturday, July 07, 2007

Industrial Output May

Preliminary industrial output data was released last Friday by the Hungarian Central Statistics Office (KSH):

"Preliminary data about the change in the industrial output, May 2007
According to preliminary data in May 2007 the industrial gross output increased by 3.2% related to May 2006 while the index adjusted by working days rose by 5.7%. The volume of the production was higher by 8% in the first five months of 2007 than in the same period of the previous year. The volume of industrial production in May - according to seasonally and by working-day adjusted indices - was below the level of the previous month by 0.2%"

Mow first off, this data is not to be confused with the Purchasing Managers Index (PMI) which I reported on here, and secondly it should be noted that this is only preliminary data, and that detailed statistics will be released at the end of next week. That being said, the reading from both sources is consistent, and certain things are reasonably clear. Let's look at the chart:

Hungary Industrial Output May

So, month on month, output actually fell. Also looking at the year on year line, the trend at present is clearly down. Now despite the fact that some analysts point to the fact that these numbers seem low due to the relatively high peaks last year, we also need to think about what they mean in terms of GDP GROWTH forecast for this year. It is still early to reach a judgment on this, but clearly we are before the possibility that the forecast will need to be revised down, and possibly substantially so.

As PH points out, the position is a mixed one, since exports continue to rise (see this post), and at a reasonably healthy clip (around 10% y-o-y growth). So it would seem that it is in domestic demand where the present weakness is being felt, and this is consistent with the April retail sales data, which showed a significant slowdown.

So obviously Hungarian growth is obviously now dependent to some considerable extent on growth in other EU economies, so it should be noted in this regard that, according to the latest Eurostat retail sales data (May) released on Thursday sales fell back in May when compared with April:

Monthly changes

In May 2007, compared with April 2007, “food, drinks and tobacco” fell by 0.3% in the euro area but rose by 0.1% in the EU27. The non food sector decreased by 0.6% and 0.2% respectively. Among the Member States for which data are available, total retail trade increased in eleven Member States and fell in six. The largest increases were observed in Lithuania (+3.6%), Estonia and Slovakia (both +2.7%) and Latvia (+2.6%), and the highest decreases in Luxembourg (-10.6%), Austria (-2.4%) and Denmark (-2.3%).

Statistics for Hungary were not among those released, but the trend across Europe at this point does not look as positive as it did, say, six moths ago. Perhaps we are now beginning to get a measure of the drag the 3% VAT hike in Germany may exercise, and how this can feed across the eurosystem.

Similar conclusions appear to have been reached by Dániel Bebesy, at the CIB Bank, Budapest

“The slowdown of IP does not bode well for the GDP growth outlook, which is likely to remain below potential thus serve as an argument for monetary easing."

The thing is, as I will explain in more detail in future posts, monetary easing may not be as easy an option as it seems due to the very high percentage of mortgages (around 80%) which are denominated in Swiss Francs. Lowering the interest rate would surely reduce the value of the forint, and thus raise interest payments for households on these mortgages, so there would be a sort of tug-of-war between two opposing impacts. Nothing from here on in is going to be easy.

Winding up, the Economist has a look this week at the situation in the Baltics, along the road it mentions Hungary:

"The other early candidate for a crash has long been Hungary, which admitted last year that it had been running a budget deficit of 10% of GDP. But a combination of tax rises and modest spending cuts has trimmed the deficit. Exports and industrial production have risen. The central bank has begun to cut interest rates. Hungary has been “disgustingly lucky”, says Juliet Sampson of HSBC, a bank."

Well, as we have just seen, industrial production is no longer rising the way it was, and indeed has fallen in three of the last four months, but lets just hope, along with the Economist that Hungary continues to be “disgustingly lucky”.

Thursday, July 05, 2007

The Referendum Debate

Well this debate rumbles on. Today Hungarian Prime Minister Ferenc Gyurcsány warns that if the referendum were held and the opposition view of Fidesz and the Christian Democrats (KDNP) won, then the lost budget revenues would need to be compensated either by withdrawing money from other areas or via tax and contribution hikes.

Let us remember the key issues are these:

The court said three questions asking whether Hungarians agree to revoke as of Jan 1 co-payments for doctor's visits, hospital stays and tuition fees at state universities can be put to a referendum.

This debate has started to warm up during the very week that Standard & Poor's argue that Poland, Hungary, the Czech Republic and Slovakia are suffering from reform fatigue:

None of the four Central European EU countries feels enthusiastic about continuing budget consolidation, as the political atmosphere is hostile and the population is exhausted by reforms. “Political unwillingness or inability to tackle structural reforms and further consolidate public finances could limit improvements in credit quality of the four largest Central and Eastern European countries (the CEE-4),” Standard & Poor's analysts wrote in a report titled “Reform Fatigue Clouds A Brighter Outlook For Central European Sovereign Ratings.”

Ageing, Opportunity or Challenge?

The world bank has a short article on ageing in Hungary, entitled Hungary’s Aging Population – A Challenge as Well as an Opportunity. Actually I think the World Bank highlight the problems reasonably well, but at the same time they may underestimate the difficulties involved in looking for solutions. In the short term I still feel that facilitating inward migration is very important, but first, of course, Hungary needs to stabilise the current economic issues she has.

Points of note in the article are:

In the first 25 years of this century, Hungary is slated to lose 8 percent of its population. The proportion of the population over 65 years of age will increase by 40 percent by 2025, so that more than one in every five Hungarians will be over 65. If this dramatic aging is not managed effectively, it could knock Hungary off the path of converging with Western European economies and it could jeopardize plans to meet the requirements for joining the Euro zone.

Indeed, the demographic transition in the former Eastern bloc has not hit the headlines as much as the political and economic upheaval since the late 1980s but still is a transition that may be just as far-reaching.

This “third transition” is the rapidly aging of the 400 million people who live in these former socialist countries. All 27 of these countries will have a significantly higher share of people over the age of 65 in 2025 than they had at the turn of the century. During the next two decades, they are projected to see their total population shrink by almost 24 million people, with Russia alone standing to lose 17 million and Ukraine another 12 million. These projections are dramatic but what really makes the situation unique is that Hungary and its neighbors to the east must deal with the impacts of aging in a much more challenging environment than its neighbors to the west. No other rapidly aging countries in the world are still in the process of developing mature economic and political institutions. And it is unique precisely because – as in Hungary – the process of demographic transition is accelerating even though the process of economic transition is far from complete.

The overlapping of the demographic transition with the incomplete economic transition thus has the prospect of altering the socio-economic fabric of Hungary and its neighbors. They run the risk of ballooning public expenditures, as historically large pension obligations mount with aging populations, and as institution-based elder care systems demand more and more public resources. These societies also face a growth challenge, as the working age population shrinks and aging individuals potentially save less.

There are two straightforward policy solutions – even discounting immigration, which may be an important factor, but socio-politically challenging. The first is increasing the participation rate of those who are of working-age population today. ......... But a second route is even more powerful – improving the productivity of those who are in the workforce. To do this, Hungary will need to commit to a range of farsighted reforms – in improving education, including adult education and lifelong learning, and in ensuring that the investment climate will encourage the creation of new innovative firms and improvement in the productivity of existing enterprises.

Monday, July 02, 2007

Industrial Production Continues To Rise

Portfolio Hungary has this:

Following a fall in May, Hungary's manufacturing industry has apparently found its footing again in June. While the PMI plummeted to 51.5 in May from 57.6 in April, the seasonally adjusted indicator rose 0.7 percentage points m/m to 52.2 in June, the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM), the publisher of the index, reported on Monday.

Now as they also note an index figure above 50 indicates expansion while a figure below 50 shows contraction in economic activity. So let's look at the graph to see what has been happening.

What we should note here is that since the Jan-March quarter 2005, industrial output has been expanding steadily. In February this year the rate of increase of output accelerated rapidly, then fell back. In May it seems to have touched bottom (since in that month it barely grew at all), and this month the expansion rate has rebounded ever so slightly. Where we go from here at this point is anyones guess, since there is no clear trend, but I would expect the expansion to continue, at least for the time being, since if it didn't, well we would be in a mess, wouldn't we.