Hungarian economy grows 3.9% in Q2

Sep 03, 2014 12:00 AM

Hungary’s gross domestic product increased by 3.9% in the second quarter of 2014 compared to the corresponding period of the previous year. The performances of construction, manufacturing and agriculture grew significantly. As the outlook on crops has improved during the year, the Central Statistical Office (KSH) revised its agricultural performance figure significantly higher for the first quarter.

On a quarterly basis, Hungary’s GDP rose 0.8%. As this was double the base figure’s reading (0.4%), the yr/yr index could go up to 3.9% from 3.7% in Q1.

The chart below depicts the structure of growth. It shows that on the production side every sector contributed to growth. Industry remains driven primarily by car manufacturing, but some supplying sectors also seem to have started getting stronger over the last few months. As the home building market remains in shambles, the construction sector remains driven by state projects. The absorption of EU funds has resulted in continuous recovery recently. It seems the agriculture will beat last year’s medium-strong performance thanks to fair weather. (As a result the stats office has revised its Q1 agricultural growth figures higher.)

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On the consumption side a fast growth in investments remains the main engine. As a result of the continuous increase even Hungary’s low investment rate started to rise.

Household consumption is also picking up, although the process is still anaemic. The Q1 figure was revised upwardly, but the 1.6% print is far from showing mighty growth. Overall, we have witnessed that a phenomenon which showed itself only symbolically in the first quarter has strengthened in the April-June period. What we are talking about is that the export-import gap widened in the negative direction and domestic absorption exceeds the rate of GDP growth. In theory, this is not a favourable structural element, but as Hungary’s export surplus is still large and the main role in domestic absorption is played by investments rather than consumption, we should not attribute too great an importance to this phenomenon just now.

Looking at economic activities as a whole, we see a wide-scale economic growth as the chart below attest too. It shows a q/q change, indicating a decline only in financial and transport activities.

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What next?

After such a barrage of good news we may seem bitter for still projecting a slowdown. This particular expectation of ours, however, is supported by both fundamental and technical (statistical) factors. By the statistical factor we mean that in order to keep GDP growth at its current level we would need the momentum of the observed processes to be kept up but from a higher base. This is hardly achievable in numerous areas. Let’s take the rate at which Hungary is absorbing EU funds. It would be a smaller miracle if the pace was just maintained in the coming quarters and even then their contribution would drop to zero. (This is also true, although for other considerations, for the weather-dependent agricultural performance or the peaking capacity in vehicle manufacturing.) Not to mention that the take-off of the Hungarian economy really started in the second half of 2013, which means that the year-on-year index will be dragger down ever stronger by the base effect.

The same can be said about economic activities. If we take all the areas where we can expect a pickup and where slowdown is more likely we will get a quite unbalanced list.

  • The only large areas where we can still hope some further expansion will take place is consumption, which could gain support not only from rising real wages but also from the expected decrease in the monthly instalments on foreign currency loans.
  • At the same time, investments driven by EU funds will certainly not contribute to GDP growth that much after the state-run projects timed to coincide with elections (parliamentary and municipal) run out.
  • Exports will lose a key engine once vehicle production capacities peak out, and
  • a slowdown in the European business cycle and the deepening Russia-Ukraine crisis could also worsen the outlook.
  • All this foreshadows smaller growth dynamics in construction, industry and agriculture on the production side.
  • A rate hike expected to be delivered by the National Bank of Hungary in mid-2015 is yet another medium-term risk, and so is the worsening capital position of banks to be caused by the government’s relief package for FX loan holders. These could slow down the lending process.

If the above positive risks materialise and the negatives not so much, economic growth may not decelerate significantly in the end.

Finally, we need to mention yet another interesting thing. The first quarter GDP data presented a new ray of hope regarding the cabinet’s fight against public debt. It was a 7.1% rise in Hungary’s nominal GDP, as real GDP growth came with a 3.6% GDP deflator. Such a high nominal GDP growth would have increased the denominator of the debt-to-GDP ratio much faster than previously expected. Today’s GDP data, however, drags us back to earth in this respect. Firstly, the Q1 nominal GDP reading was revised downwardly by the stats office. Secondly, the Q2 GDP deflator is now much smaller (in line with the inflation data). Therefore the GDP deflator for H1 is only 1.6% and nominal GDP went up 5.5%.

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