Hungary records deeper than expected recession (2)

The data is worse than even the rather pessimistic expectations. The market forecast a 2.1% GDP contraction in annual terms. A largely 0.5% q/q decline would have been consistent with that figure. Instead, the 12-month index adjusted for calendar effects (considered as the headline figure by Portfolio.hu) came in at -2.7% and the quarterly change showed an 0.9% drop.

As the chart above shows the difference between the three indices (raw, calendar-adjusted, swda) is very small therefore our view of the economy can be rather uniform.

Looooong recession

The Hungarian economy is going through its umpteenth recessionary period since the change of regime. The most painful in the current one is that it is a lot longer than it could have been expected. Economic output has been continuously coming in lower in each quarter than in the preceding one. Hungary earned its entitlement to use the word ‘recession’ a long time ago since it requires only two consecutive quarters of contraction and Hungary is up at four already. Moreover, even the three quarters before that showed stagnation, so in view of this we are talking about the longest period of recession in the country. Looking strictly on recessionary periods the one during the 2008-2009 crisis was longer. In order to leave that negative record unbroken Hungary’s GDP must show growth in Q1 2013.

The main causes

Although detailed figures will be released only a few weeks from now, the monthly macro releases can still give us an idea why output contracted so much.

The fundamentally weak GDP figure is rooted in the simultaneous ailing of several sectors. You’d need a very powerful microscope to find a single area in the economy that showed growth in Q4 2012, according to the monthly statistics. The most painful was the decline in the volume of industrial production - there was a decrease of around 4% on a quarterly basis here. While this is not the same as IP calculated on a value-added basis (which we will know only when the detailed figures are published), but the outlook is definitely not improved by the fact that the only powerful engine of the economy is acting up real badly.

The construction sector most likely did not contribute positively to growth in Q4 either (although we still do not have the Dec print). This sector has been a drag on growth for a long time now. The production volume dropped so much over the past few years that it is hardly more than half of the 2005 level.

The sector caused a pleasant surprise in the third quarter last year, when it showed improved performance but apparently that was only a fluke. Although there are signs that the construction sector will hit rock bottom soon, the October and November stats indicate that it was in fact a drag on GDP in Q4. We can say the same thing about farming too, which recorded poor figures last year due to weak crops.

Output was further held back by a decline in real wages and the shortage of loans, which is keeping the domestic absorption components (consumption, investment) on a descending trend.

While we are examining and digesting the 2012 factors behind recession, 2013 may pose even more exciting questions. The smaller fiscal adjustment than last yaer and the cautiously improving business cycle indicators give us hope that sometime during 2013 the economy will get out of recession. At the same time, analysts generally agree that the structure of adjustment is detrimental for growth. How drastic a drag on GDP this will prove to be is not known at this point, given that we have not seen any adjustment that was leaning so strongly on taxes on the corporate sector.

We will have to wait several months for that answer since we have practically no economic statistical figures available for this year yet. Until then we can cling on the hope that a slow improvement in sentiment and industrial capacities starting up this year will get the economy out of recession.

"The last time we saw contraction this steep was in the fourth quarter of 2009 when the annual contraction was 4.4%," commented Pál Pozsonyi, statistician at KSH.

"The agricultural sector recorded a 20 percent annual fall in the third quarter and the fourth quarter figure is comparably low. Industry output also showed a contraction, which is evident from the monthly output releases. Exports began to shrink in November as well, and domestic consumption shrank too," Reuters cited him as saying.

“Suffice to say dreadful numbers, which puts Hungary at the back of regional growth pack alongside Slovenia which is in the middle of a banking crises. I guess this increases the chances that the Orban government will further reach for unorthodox policy leavers as they head into election season," commented Timothy Ash, strategist at Standard Bank in London.

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