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Sunday, August 31, 2008

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.

Saturday, August 30, 2008

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.

Hungary's Investments Remain Weak in Q2 2008

The level of investment in Hungary dropped by 2.1% year on year in the second quarter, indicating that those who imagine there is an economic upturn coming just around the corner may well have to wait yet awhile to see it. The investment rate, however, did improve slightly from the first quarter, ancd was up by 1.1%, according to seasonally adjusted figures.

The basica reason for the extremely weak investment performamce in Hungary is clear enough, the sharp drop in investment in the public sector, down 40% year on year in the April-June period, following the introduction of the government austerity package. The volume of public sector investment has fallen to a third of what it once was in just two year, and the public sector contribution to total investment in the national economy is now only 3.5%.

However public sector activity is not the only factor, since it is also important to bear in mind the continuing decline in the number of new homes. According to KSH data, there was a drop of 30% in occupation permits in the lastquarter when compared with Q2 2007, and this situation is clearly reflected in the numbers for the real estate, renting and business activities section.

There was also a 2.4% year on year drop in the volume of investment in manufacturing industry in Q2. Large retail chains, however, do keep expanding, despite the contraction in domestic consumption. Thus there was a 16.5% year on year growth of investments in wholesale and retail trade in the second quarter. There was also a minor boom in investment in machines, equipment and vehicles (up 10.5% year on year in Q2). Rising transport, storage and communication investments (up 21.6% year on year) showed a similar trend, while the volume of construction investment was down strongly (11.2% year on year).

Wednesday, August 27, 2008

Hungary Central Bank Keeps rates On Hold

Hungary's central bank (NBH) Monetary Council decided on Monday decided to leave its key policy rate unchanged at 8.50%. The rate has now remained unchanged since last May. In general the market did not expect the MPC to change the base rate today and the main debate is over when we will see the first signs of monetary easing, although this may be more difficult than it seems given the need to underpin the value of the forint.

Also the National Bank of Hungary (NBH) and the Hungarian government agreed on Monday to maintain the inflation target at 3.0% for the next three years. Finance Minister János Veres and NBH Governor András Simor announced the decision at a press conference after the Monetary Council left the base rate unchanged.

The smaller-than-expected reduction oin the headline inflation forecast and the vaguely hawkish comments from bank governor Simor tend to decrease the prospects of an early interest rate cut. It now seems increasingly likely that we will have to wait till 2009 to see the first rate cuts.

The most likely scenario is that the NBH will stay on hold over the next few months, barring some radical external or internal development. The NBH would like to see some sign that the labour market loosening finally results in a moderation of wage inflation, and also a decline in actual inflation, either (or both) of which would be good news for expectations.

Tuesday, August 19, 2008

Hungary Construction Activity Falls Back Sharply In June

This is really a bit of a shocker I think, since following signs of some sort of small recovery in April, output inHungary's construction industry fell by a seasonally and working day adjusted 9% year on year in June, contracting even more rapidly than in May (6.7% fall year on year), according to the latest data from the Central Statistics Office (KSH) earlier today.

Even more disturbingly there was a 5.4% month-on-month decline in output from May, against only a 0.8% contraction in May from April. If we look at the chart for the construction index (below) we will see that output is now not far above the very low levels in September and November 2007.

And the outlook in the immediate future doesn't seem to be any more promising, since the stock of orders was down 35.2% at the end of June over June 2007 (vs. -35.8% in May). The corresponding figure for new building orders was -35.1% and -35.2% for civil engineering. The stock of new orders in January-June was down 13.8% across the whole sector.

Now one reason for this slowdown can be that new mortgage lending seems to have virtually ground to a halt in Hungary since last March, and indeed the total outstanding mortgage debts seems to be reducing (see chart below).

The same even seems to apply (or perhaps especially seems to apply, as the credit crunch gradually locks-in) to those beloved Swiss Franc mortgages (see chart below).

So really, the outlook for domestic demand in the coming quarters looks pretty downside oriented to me.

Hungary Wage Growth Ticks Up Slightly In June

Gross wages in Hungary rose by 9.7% year on year in June, up from 9.6% in May, according to data out today from the Central Statistics Office (KSH). The closely watched bonus-adjusted net wage growth in the private sector accelerated to 8.9% from 7.4% in May. This number is thought to be significant since the central bank regards this as a key trend indicator. The number of public sector employees - though up slightly from the lows hit in the earlier months of 2008 - still continues its annual decline - falling by 4% in June, following a 4.5% y-o-y drop in May.

Real wage in January-June was up 0.5% yr/yr based on a consumer price index of 6.8%, this compares with a 0.3% growth rate over the Jan-May period. Gross wages were up 8.2% yr/yr and net wages increased by 7.3% yr/yr in the first half of the year in the whole economy.

Gross monthly wage in the private sector grew by 8.7% yr/yr in June, up from 8.4% in May, while the increase in the public sector was up 12.7%, down a little from May's 13%. Net wages in the private sector rose by 7.5% yr/yr in June, up from the 7.3% recorded in May, while public sector wage growth dropped fractionally to 10.9% from 11%. In inflation pressure terms it is not good news that the ex-bonus wage increase in the private sector rose to 8.9% yr/yr in June after the 7.4% recorded in May. May's number had been the lowest rise in the past two years.

The number employed in the Hungarian economy dropped by 0.9% yr/yr in June, following a 0.2% fall in May. Employment was down by 0.4% in the private sector and by 4% in the public sector. There are now over 100,000 fewer employees in the private sector than in June 2003.

A number of factors are thought to have been behind the rise in ex-bonus private sector wages, some of them "one off" factors like the lower number of working days in May. A breakdown of the details reveals that the acceleration was to some extent driven by increases in the financial sector (up by 14.8%y-o-y from 4.9%y-o-y) in May. Also according to the Statistics Office the significant increase in the headline figure was due to higher bonus payments in June at several "large financial institutions."

Despite the concerns raised by today's data I continue to expect that the NBH will keep rates on hold at the August meeting.

Thursday, August 14, 2008

Hungary's Economy Picks Up A Bit Of Speed In Q2 2008

Hungary's gross domestic product grew by 0.6% quarter on quarter in April-June, according to first estimate seasonally and calendar impact adjusted figures released today by the Central Statistics Office (KSH) . Q-o-q GDP growth in the previous quarter was revised up to 0.6% from the previous 0.3%. So effectively the Hungarian economy has maintained the same pace in Q2 as in Q1, and the increase in the y-o-y number is simply a product of the low base effect in Q2 last year.

Economic growth in Q2 was 2.2% yr/yr according to unadjusted data and 2.1% according to figures adjusted for calendar impacts. The comparative figures in Q1 were +1.7% yr/yr (unadjusted) and +1.0% yr/yr (adjusted). This latter figure has been revised upwards from 0.9%.

The Statistic Office told Reuters that the production side estimates shows that:

# agricultural output performed better than expected,
# the government sector also expanded particularly the health care services,
#the construction sector stopped contracting

The statistics office will publish a detailed breakdown of the data on 5 September, but it is not unreasonable to assume that the better-than-expected result was mainly a product of a stabilisation in the contraction in retail sales and construction, an improvement in theagricultural sector and a higher net exports contribution

Tuesday, August 12, 2008

Hungary July Inflation Holds Staedy At 6.7%

Hungary's inflation rate remained unchanged in July at 6.7 percent as the rising forint - which has gained 11 percent against the euro over the past six months - kept a cap on the effect of energy price growth. The annual rate still at more than double the central bank's target. Consumer prices rose 0.1 percent from June. Core inflation, which strips out volatile food and energy costs, rose to 6 percent year on year and 0.4 percent in the month.

Food prices dropped 0.7 percent, falling for a second month, with an 11.4 percent decline in the cost of seasonal products such as potato, fruits and vegetables. Services gained 0.9 percent on the month, the biggest increase since January, mostly because of increases during the summer tourist season. The central bank is likely to find some comfort in the absence of second-round effects with the price of durable goods falling by 0.6 percent, the biggest decline since February 2007.

The forint, which reached a record of 227.99 forint per euro on July 18, was trading at 237.68 per euro at 12:02 p.m. this morning in Budapest, compared with 237.84 yesterday while the yield on the benchmark three-year bond rose to 8.61 percent from 8.52 percent.

Friday, August 08, 2008

Hungary's June trade surplus narrowed when compared with June last year as the economic slowdown in the European Union curbed export demand and rising fuel costs increased import growth.

The surplus, the fifth consecutive on this year, totaled 100.3 million euros ($208.9 million), compared with 27.5 million euros in May and 137.2 million euros in June last year. The figures are preliminary.

Imports increased 8.4 percent in euro terms in June from a year ago, outpacing exports, which rose 7.6 percent. In the first six months, the surplus was 468.3 million euros, compared with a deficit of 165.3 million euros a year earlier.

So exports rose slightly from May's poor showing, but the general trend is down, and looking at the data coming in from the eurozone economies it is unlikely to turn up again in the near future.

Wednesday, August 06, 2008

Where Now for CEE and Baltic Currencies?

By Claus Vistesen: Copenhagen

Ever since the illusive credit turmoil began sentiment in the market place has been fickle and essentially, like the assets of which it consists, volatile. We started off with an adamant focus on downside risks to growth which then turned into a focus and fear of inflation. Now, as the cyclical data has turned for the worse in Europe and many places in Asia the focus seems to be reverting to growth. Now, I won't go into the whole decoupling v recoupling discussion at this point since I think that this dichotomy is a false one. It never was about de-coupling à la traditionelle but moreso about two interrelated points. The first would be the extent to which the world already has decoupled from the US in the sense that a key group of emerging economies are now set to ascend in economic prowess. The second would be the extent to which the de-coupling thesis always built on a fallacy. The main point would be that the main fault line of slowdown was observed across economies with external deficits; something which, I am sure most will agree, is sure to impact surplus economies too.

Now, that does not completely let the ECB off the hook since by maintaining a focus on inflation it also assumed the role, if only temporary, of the new anchor in a re-wamped version of Bretton Woods II as the Euro ascended to new highs. This bet on global re-balancing was always going to end in tears and in this light the Eurozone could not decouple from the US; that much, I think, is true.

The key issue here however, as I have argued time and time again is represented in two crucial interlocked questions which together form a key structural trend in the global economy. One is what happens when the surplus economies slow down and there is not sufficient demand to pull the economy back up? Demographics and a high median age are key variables to watch in this regard. The second question is the extent to which hitherto deficit nations can turn the boat around and increase savings (i.e. rely more on exports) and what it will mean for global capital flows when they begin this process?

In the context of the CEE economies the themes above are also present. In a recent note I detailed the change in sentiment from growth to inflation and what it might mean for Eastern Europe's economies and their respective currencies. The key situation as I sketched it was one of a dilemma.

On the one hand, the rampant inflation levels suggest that the exchange rate be loosened to allow appreciation and thus pour water on the roaring inflation bonfire. On the other hand however the Baltics, as well as many other CEE countries, are saddled with extensive external deficits financed by consumer and business credit denominated in Euros. It is not difficult to see that this represents a regular vice from which it will be very difficult to escape since as long as the peg remains deflation seems the only painful alternative as a mean of correcting.


Another point which is specifically tied to Eastern Europe is that if domestic nominal interest rate increase to keep up with inflation rates it will have a strong substitution effects towards Euro denominated loans. This can become a dangerous cocktail should the tide turn against the currencies.

Now that the focus seems to be changing back again it appears to be a good time to revisit the situation

Within this global nexus of what exactly to do with inflation relative to growth, many Eastern European economies has so far opted to go for inflation by raising interest rates. At an initial glance this seems quite reasonable and in many ways the CEE central banks merely latched on to market sentiment and expectations that many emerging economies would seek to use nominal appreciation as a tool to flush out inflation.

Consequently we have seen how both Ukraine and Hungary have chosen to loosen the peg to the Euro as well as other floating currencies in Eastern Europe have seen their yield advantage increase in an attempt to flush out inflation. This has not been without problems though or more specifically it is not clear that an appreciation of the currency is all for the good. Two points here would seem particularly important. One is the simple question of whether in fact an appreciation is deflationary in a world where capital flows, and in particular the hot kind, act strongly on yield. However, another point would be specifically tied to the situation in Eastern Europe. As such, nominal appreciation of the currency also increases the purchasing power which is not what many CEE economies need at the present time as they stand before the task of correcting a rather large external balance. Moreover, rising domestic interest rates will increase and exacerbate the credit channel by which loans denominated in Euros and Swiss francs become more attractive. I have shown this to be true, for example, in the context of Lithuania. The important thing to do note here would what would happen to the servicing of these liabilities should the domestic currencies depreciate.

What happens next then? Or more concretely, even though CEE currencies, in general, have enjoyed a rally on the back of market expectations of nominal appreciation fed by hawkish central banks what happens if and when central banks reverese course?

An initial warning shot across the bow was handed to us as the governor of the Czech central bank mused that he might lower rates come next meeting due to the strenght of the Koruna and the subsequent effect on exports. Also Poland recently opted to abandon the hawkish stance as rates were kept steady. In light of this event Macro Man managed, as ever, to hit the proverbial nail on the head.

There is little more bearish for a currency these days than abandoning the inflation fight in a pursuit of growth; this is particularly the case when the market is heavily positioned the other way.

This is exactly the issue which now confronts many Eastern European economies. What to do as growth visibly tanks at one at the same time as inflation stays high. One thing here would be for the central banks to hold their raising cycle which in itself should ease the pace of appreciation but what if they need to lower rates.

Now the numbers above do not, in themselves tell anything remotely interesting. For one, the difference between the economies are quite big. For example the Czech Republic has been able to gain, with a comparatively low interest rate, currency appreciation which has actually helped the external balance in so far as it has made imports cheaper. Obviously, at this point the benign effect on the trade balance is just as much down to decreasing domestic demand as the value shield of a dear currency. On the other hand, if we consider especially Ukraine, Romania, and Hungary the price has been dearer and the subsequent effect on inflation less pronounced. One could always argue that the situation would have been much worse, but one thing is certain; the ensuing loss of competitiveness has not been compensated for with a decrease in inflation. And one has to wonder whether pushing nominal interest rates ever higher would be a sound solution.

The key here is that these high interest rates carry with them a high lock-in premium which makes it difficult to reduce them without causing substantial pain to the currency. Add to this that as long as interest rates stay in this territory the incentive to borrow in foreign currency remains very appealing. In fact, the incentive structure here is quite disruptive as many of these economies have higher rates on domestic currency deposits and lower rates on foreign credit. This incites consumers and companies to place their deposits in local currency while funding themselves in foreign currency. Finally, there is of course the more standard economics 1-0-1 point that whatever nominal rate is ascribed to a currency and an economy the latter needs to be able to provide the structural demand for which to satisfy the yield. Otherwise you just pour more gasoline on an already raging bonfire.

Obviously, as long as the local currency remains strong and on an upwards march or the trading band is kept in place the show goes on. But the longer this structure lingers the more difficult it will be to break free; and break free they must since I am quite sure that Eurozone membership is off, for the immediate future at least.

Another more hard hitting point would simply be that whatever growth momentum these economies had going into 2008 it is now steadily levelling off. Now, these economies need to rebalance their external accounts at the same time as they labour under the yoke of slowing growth, high interest rates which are difficult to reduce and/or a quasi fixed exchange rate to the Euro. Can you feel the chilling cold of deflation blowing across the Urals? I can.

Basically, the past years' rapid process of nominal convergence will now need to be kicked into reverse, since it is quite obvious that many CEE economies have been riding a blade too tough.

Be Careful Indeed

Last time I massaged this specific topic I summarised by ominously stating that the CEE economies and their central banks should be careful what they wished for in terms of using higher interest rates and subsequent nominal appreciation of their currencies to flush out inflation. The key point was that the effect would likely be limited and only further worsen the imbalances in the economies. And thus, here we are.

Another more subtle point in the context of market reactions would be the boomerang effect which comes from the currency appreciation as interest rates are increased (and the peg/band abandoned) to the subsequent plunge when the economic tide turns. In line with the change in global sentiment towards growth and deflation (see e.g. here) and the fact that other hitherto strong yielders (e.g. the Kiwi and Aussie) are beginning to falter we may be at an inflection point in the whole discourse of upwards movement in CEE currencies. Stephen Jen's recent tour of global FX markets is a fine addition to this argument.

As ever, this is obviously still a dilemma for most of these economies since inflation continues to rage ahead. In Romania for example the PPI rose at its highest pace since 2004. However, as long as the credit tap stays open and as long as the purchasing power is increasing so will the the demands for higher wages stay strong. This is particularly true in the context of the CEE economies as these are in possession of structurally broken population pyramids after two decades worth of lowest low fertility and, in the cast of the latter decade, net outward migration.

The main point I would like to emphasise here is that correction is coming and that it will only become harder the higher the currencies move upwards. In a more general light this correction will not be a small one and it most certainly will not be felt exclusively in Eastern Europe. Basically, the big hidden data point in all of this is the dependence of Germany on CEE imports. So far, this has moved along just nicely but Germany is in for a rude awakening once the link breaks ... and break, I am afraid, it will.

Hungary Industrial Output Declines In June

Hungarian industrial production fell in June for the first time since 2004 as gains by the forint made exporters less competitive. Production fell 0.3 percent from a year earlier, compared with a 4.7 percent increase in May, the Budapest-based statistics office said today. Output fell 1.6 percent in a month.

Looking at the chart the pattern is, unfortunately, all too clear. It seems to me we are looking at a quarter on quarter GDP contraction in Q3 2008. The high forint - which rose 2.1 against the euro in June and has gained 7.3 percent so far this year - is now starting to take its toll, since it is hurting exporters that sell mainly to the European Union, which buys the majority of Hungary's products. The slowdown in the UK and the eurozone is also, either directly or indirectly, starting to have an impact.

Hungary's economy expanded an annual 1.7 percent in the first three months, accelerating for the first time in five quarters, driven by exports while government measures to narrow a budget gap curbed domestic consumption. Growth was 1.3 percent last year, the slowest since 1993.

Tuesday, August 05, 2008

Hungary's Exports Fall In May 2008 (Updated - Detailed Results)

According to preliminary figures from the Hungarian Statistical Office (KSH) 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.

As a measure of the level of "interlocking" which is now in place with Germany, we should note that German exports also declined month on month in May, but in this case only by 3.2 percent from April, It is still however the biggest monthly drop in German exports since June 2004. My recession risk assessment for the German economy can be found here on RGE Monitor.

In Euro terms exports in May were EUR 6,096.5 m, up by 6.7% year on year, (but still down on Aprils EUR 6,431.8 m) and down from the year on year growth rate of 22.8% registered in April. Imports were EUR 6,049.4 m, 6.2% more than in the same month of 2007, while in April the growth was 18.2%.

The May trade surplus was EUR 47.1 million which compares with a surplus of EUR 54.2 million in April and EUR 20.4 million in May 2007.

Detailed Results 5 August 2008

The KSH have now published the revised detailed trade data for May 2008. Hungary posted a trade surplus of EUR 27.5 million in May, according to final data, some EUR 20 million less than the preliminary figure.

The EUR 27.5 m surplus booked in May is practically the same as it was in the same month of 2007, which means Hungary's trade balance failed to improve over the year.

Year on year growth in the volume of exports was only 2%, which suggests that the downturn in the eurozone and other EU countries is now leaving its mark on Hungary's external sales. The April figures now seem to be a complete anomaly - associated with the timing of Easter perhaps - and if we take the March - May 3 month average we only get about 8% year on year growth, which while it isn't a bad number, is well down on the twevlve month average pre March. And we need to bear in mind that moving forward the number may drop even further. In which case Hungary, as an exports driven economy is going to get virtually no headline GDP growth moving forward as agriculture finally settles down again.