It is time to see whether Hungary's economy really took off or not

Slowdown at year-end

Q3 GDP data caused a huge upside surprise. Hungary’s economic output increased by 0.9% q/q and 1.8% yr/yr. The key driver was agriculture (+27.6%) with much better average crops than in the drought-ridden year of 2012. Industry grew slightly by 0.4% and services increased by a mere 0.1%.

Analysts in a Portfolio.hu poll project Q4 GDP was close to stagnation on a quarterly basis and grew in annual terms mainly over base effects.

“The acceleration should be largely driven by base effects, as in q/q terms GDP likely stayed very close to flat, due to the weakness of the industry seen in the last three months of the year," commented Gábor Ambrus, strategist at 4Cast in Sofia.

“The weak industrial performance was likely offset by a pick up in the services sector and stronger construction figures which were positively affected by state sponsored large scale infrastructure projects," he added.

It is also likely that the outstanding Q3 growth figure will be revised, commented András Balatoni, analyst at ING in Budapest, who thinks the 0.9% q/q reading will be revised downward to 0.5% by the stats office.

Balatoni believes the fourth-quarter growth will be even lower than that due to feeble industrial production and declining exports. Although construction and retail sales fared well, the decrease in imports suggest that inventories diminished, i.e. domestic absorption will not be so strong.

Agriculture is expected to have continued its massive performance and the construction sector must have stepped on it too (partly because of a pickup in EU-funded investments at the end of the year, which was also the end of the EU’s 7-year budget cycle, and partly thanks to the mild winter weather), whereas industry fared better only over base effects, commented Gergely Suppan at Takarékbank. He thinks that on the consumption side growth was driven mainly by foreign trade and investments, with a moderate growth in consumption, but inventories were a drag.

The Budapest-based analysts at Erste expect a mildly positive growth figure for Q4 2013, agreeing with their peers that the 12-month GDP reading will be favourable only due to the extremely poor Q4 2012 print. They noted that while industrial production grew at a slower pace in Q4, fortunately the big dip recorded in the preceding years did not occur this time. Exports went up more than expected in December and based on retails sales figures consumption could have also picked up, they added.

Analysts at CIB, the local unit of Italy’s Intesa Sanpaolo, expect to see an upside surprise, saying a better-than-expected GDP reading is not entirely impossible. However, they still believe that even in that case annual average growth will not be meaningfully higher than 1%.

Czech Republic: -0.3%, Poland: +2.9%

Flash growth prints for Q4 2012 will be all out on Friday morning. Magdalena Polan, a London-based analyst at Goldman Sachs, expects these to show that the recovery progressed across the region.

“We expect fairly strong acceleration in annual growth in Poland, to +2.9%yoy (nsa), +2.3%yoy (nsa) in Hungary, and -0.3% yoy (sa) in the Czech Republic. This acceleration will be driven by stronger sequential (quarter on quarter) growth in 4Q2013, as well as base effects (since end-2012 marked large slowdown across the region)," she said. She noted, though, that these releases will include only flash prints, with limited information on GDP breakdown.

“However, we think that Q4 dynamics remained similar to that in Q3. Contribution from public and private spending likely increased, while fixed investments growth was limited. Judging by the survey data, inventory accumulation should have supported growth. On the external side, we expect net exports to be an important growth driver in Poland (where the adjustment in domestic demand started later) and to smaller extent Hungary," Polan added.

Full breakdowns of Q4 GDP data will be published on February 28 (Poland) and March 6 (Czech Republic and Hungary). For Hungary, she expects average 2013 growth to come at +1.0%, and +1.8% in 2014.

More balanced growth possible

Balatoni at ING believes the end-year production intervals could be made up for swiftly and the industry could switch to a growth rate of 4-5% from February onward. He also thinks a robust growth could be recorded in consumption and retail sales in the first half of the year, while investments may be driven by (quasi) fiscal investments.

Analysts at Erste believe the slow recovery can continue this year. Investments are to be propped up not only by the central bank’s Funding for Growth Scheme (FGS) but also by the inflow of EU funds. The role of state projects will remain key, as well. Also, household consumption, which the market thinks could have started growing in Q4 last year, will probably continue to increase. After hitting a multi-decade low, a positive turn may be recorded in this area as well, the analysts forecast, adding that low inflation could greatly contribute to this.

The contribution of industrial exports to growth is also expected to remain significant, as orders data in vehicle manufacturing turned out to be promising in the past few months.

The big question is whether other manufacturing sectors will be able to present growth or not this year. In this respect it is of key importance how the economic outlook on the euro area will turn out.

Suppan thinks the Hungarian economy can grow in a balanced structure in 2014, with household consumption, investments and foreign trade (net exports) equally contributing to growth.

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