Engines of growth are choking in Hungary - Portfolio.hu Poll

Several economic data have been released recently that pain an ever gloomier picture on the outlook of Hungarian growth. One of these was the latest report on industrial production which showed that growth has practically evaporated from the sector.

And the other one was the preliminary external trade statistics which showed a plummet in the growth rate of exports, the sole engine of growth in the country.

The extreme strengthening of the Swiss franc, the money market freeze and the rising fear of recession on developed markets can provide further impediments to economic growth in Hungary. All these factors left a mark on estimates too. The consensus forecast for Hungary’s annual average GDP growth dropped to 2.5% from 2.8% for 2011 and to 2.6% from 3.2% for 2012.

If the car industry also ceases to be an engine of growth...

“The short-term business cycle indicators - retail trade, industrial production, new car registrations - all showed a decline on a quarterly basis. The only counterbalancing force could be expected from the agriculture’s side where an increase in crops is likely," said Győző Eppich, analyst at OTP Analysis Centre.

The respondents noted that in view of the latest set of macro data they have revised their growth estimates downward. “Our H2 2011 and 2012 forecasts are also under revision," said Zsolt Kondrát, analyst at MKB Bank.

Regarding the outlook for beyond Q2, István Horváth, analyst at UniCredit noted that the full-year growth could be boosted by the last quarter of 2011, primarily as a result of the completion of auto industry investments and the start of production. The general trend, however, is likely to remain unchanged, i.e. net exports will remain the sole engine of growth, but the outlook will be determined primarily by global events, which for the time being hold downside risks.

Zoltán Török, analyst at Raiffeissen Bank in Budapest, believes that the worsening external environment will lead to lower export dynamics despite the car industry investments and capacity boosts, projecting that the increase in domestic demand will be hardly over zero.

The growth outlook will be weighed down on not only by the worsening external market prospects but also by a persistently strong Swiss franc, noted Zoltán Árokszállási at Erste Bank. In his view, household consumption will growth by even less than the whole economy.

Darren Middleditch, economist at Capital Economics in London estimatesthat growth quickened slightly in Q2 (to 2.7%), “owing mainly to a recovery in industrial exports (to Germany for the most part)."

He forecasts an average output increase of 2.5% for this year and 2.6% for 2012. “Slower growth in key EU export markets, amid worries over the euro-zone sovereign debt crisis, will constrain Hungary’s ability to sustain economic growth," he noted regarding this year’s prospects. As for 2012 he said: “The labour market will remain weak and the government will have little scope for fiscal stimulus, if it were needed owing to any fallout from increased investor risk aversion following the US sovereign downgrade."

Inflation easing slowly

No meaningful change is expected in Hungary’s CPI in July compared to the June print. Analysts at CIB Bank pointed out that the base effect is working against the 12-m indicator, but on a month-on-month basis they do not believe the rise will be larger than 0.1% (but they do not exclude a downside surprise here). Fuel and energy prices could have fuelled inflation in July to some extent, but seasonal food prices and clothing prices likely have dropped a lot. The analysts see an uptick also in services prices (on seasonal factors), but project no major shift in the other categories.

“Following the sharp fall last month, reflecting lower food prices, we expect prices to be broadly flat this month," Middleditch noted.

He expects inflation to start to fall markedly in Q4, “as the effects of the global commodity price shock unwind and domestic demand remains lacklustre."

“With the economy set for a continuing period of below trend growth, underlying price pressure should remain muted" (also in 2012," he added, forecasting 2.7% yr/yr CPI for Dec 2012.

No rate cut in this environment

Despite the expected moderate rise in inflation in the autumn months (based on the 2012 outlook) a rate cut may be carried out, but amidst the current market conditions the National Bank of Hungary (NBH) will not apply monetary easing, prioritising financial stability aspects, analysts at CIB said.

Any worsening in global growth outlook to reduce whatever domestic price pressures there are

Magdalena Polan, analyst at Goldman Sachs projects that after falling noticeably in June, all CE-3 countries will report broadly flat CPI figures for July, “mostly on the account of declining annual inflation in food and energy prices."

“This would reflect strong negative base effects related to substantial price increases in 2010 Q3 in both categories and some final effects of the Q2 moderation in commodity prices. This would come in addition to some seasonal effects (particularly in case of food) and summer sales. This development would be similar to that in other countries in the region where changes in non-core items, particularly food prices, drove most of the fluctuations in headline prices. Current consensus forecast also calls for roughly flat prints."

When it comes to core inflation, Polan believes that it remained flat or increased slightly, depending on the strength of the pass-through of earlier price shocks (still visible in Poland and Hungary) and the very definition of a core inflation measure (which, for example, in the Czech Republic, includes some food prices).

“However, even in the countries where we expect core inflation to continue accelerating (in particular Poland), we still do not expect to see any second-round effects of earlier price shocks, mostly because of the continued weakness in the labor markets."

“Going forward, we see this summer’s decline in inflation as temporary, and expect another acceleration in inflation in Q4, on the account of waning base effects and again rising fuel prices. But afterwards, we see inflation trends diverging, mostly in line with planned tax changes, reaction to higher oil prices, and the underlying domestic demand developments. In Hungary, where we believe inflation is most sensitive to fuel and energy prices, we expect inflation to remain above the target in 2012 and even re-accelerate towards the end of the year, in line with our strong view on oil prices. Pass-through into other prices would then keep core inflation also elevated."

Polan noted that global and local growth developments could alter this view, though.

“Any deterioration in growth outlook would reduce whatever domestic price pressures there are in the region (for example, in Poland) or lower the pass-through of tax hikes (in the Czech Republic). Also, a softening of global growth would also reduce pressures on commodities, lowering the risk of imported inflation (especially important for Hungary)."

“The biggest uncertainties for short-term inflationary processes lie in food prices. In this respect, the July CPI print could be of great importance since it will be the first from which we’ll be able to draw conclusions on how gradually the price shock in the agriculture will peter out," commented Eppich at OTP. The methodological change introduced by the Central Statistics Office (KSH) in early 2011 only adds to uncertainties.

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