The volume of Hungary’s construction output declined 3.2% month on month in July 2016, and the contraction in annual terms came in at 17.6%, the Central Statistical Office (KSH) reported on Thursday. In view of these two figures we might start to mourn the demise of the sector, but we shouldn’t.
In fact, the sector reached rock bottom this March and it has been improving ever since. After dynamic growth recorded in April, May and June, the contraction in July was not drastic enough to break the trend.
We could best describe the situation of the sector by saying that the shrinkage of EU funding made the plummet inevitable, but the sector regained its composure rather quickly. Of course, output is rising from an extremely low base, but we have no reason to think that this recovery will not continue in the coming months.
The pickup on the drawdown of EU funds will once again create demand in civil engineering, while the construction of buildings also gained momentum as home buildings picked up. The latter is not really visible in the index just yet, but we should see the impact in the second half already.
The orders data reaffirm our outlook on the sector. The volume of the stock of contracts was 63.5% higher for the construction of buildings. Although the stock of contracts for civil engineering works was not even half of the 2014 peak, but it is also double the December 2015 print, i.e. orders are constantly coming in.
Despite the feeble July print we continue to believe that the volume of construction output will be seriously larger in the third quarter than in Q2, i.e. on a short base it can already make a positive contribution ot GDP growth. Due to the small weight of the sector, though, we do not think that this effect can be larger than 0.1-0.2 percentage point.
Consequently, the construction sector looks much better than its “big brother", the industry from the aspect of a short-term economic situation. Based on yesterday’s IP numbers it seems that demand in the industry is slackening. The feeble production data came hand in hand with rather poor orders figures too. If these do not show that the usual recesses in August came about in July (although the PMI prints suggest that this was not the case) and another weak reading hits in the last summer month then industry will also be a drag on GDP.
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