Hungary Q414 economic growth surprises on the upside

Feb 13, 2015 12:00 AM

Hungary’s gross domestic product (GDP) grew by 0.9% quarter on quarter in the October-December period of 2014. In annual terms economic output grew by 3.3% in Q4, according to data adjusted for calendar effects.

The data is a surprise since the market was expecting the yr/yr index to moderate to 2.8% in Q4 from 3.2% in the third quarter. Adjusted for calendar effects this is in fact a 2.6-2.7% projection. The 3.3% actual figure marks a slight uptick, but it is more important that growth came to 0.9% compared to the third quarter, up from 0.5% q/q in Q3.

In its first estimate the Central Statistical Office (KSH) does not publish detailed figures. In its brief statement released on Friday it only said that the increase was mainly due to the increasing performance of manufacturing and agriculture. As this refers to the yr/yr figure, this provides little help for the interpretation of really relevant 0.9% q/q data.

For instance, we had no way of knowing that industry will show growth on a quarterly basis, as the monthly readings suggested a 1.5% decline in the volume of production. True, we saw it several times over the last few quarters that the sector’s added value rose faster then the production volume. The same applies to the construction sector. On the basis of volume data it also showed a slight contraction in the last quarter of 2014.

In view of the above, the source of the 0.9% q/q GDP rise is mysterious, looking at the production side. The most likely scenario is that a few sub-sectors in services picked up so much that GDP was boosted to this extent. (A KSH statistician told that a few services sectors, including tourism, fared well.) There were two things that might have foreshadowed this surprise. Firstly, the estimates derived from sectoral data substantially undershot the actual figures already in the third quarter. The second (and not too subtle) sign was that Economy Minister Mihály Varga announced a press conference yesterday for after the publishing of the official GDP data. Considering the "asymmetry" of the ministry’s communications in this regard this suggested better-than-expected data.

The higher-than-expected quarterly GDP print took the annual average figure to 3.5%, versus estimates for 3.3-3.4%. The fresh figure is the highest reading of the past eight years. As you can see on the chart below, Hungary is past a W-shaped crisis which was caused by the global financial system crash and the European debt crisis, and the zigzag of Hungary’s economic policy between 2011 and 2012 that was only the cherry on top.

"We have good reason to assume that by now the performance of the Hungarian economy has surpassed the level from before the 2008 crisis," Economy Minister Varga commented the data today. According to our calculations, this is not entirely true yet. We are slightly behind the 2008 GDP level, in our view, but overall we can say the Hungarian economy has made up for the downturn it suffered during the crisis. The chart below also attests that, but our statement is not based on that, as we have used more accurate and detailed figures for our calculations.

The upside surprise is not Hungary-specific. Germany’s GDP was 0.7% higher in the fourth quarter than the third, the national statistics agency De Statis reported today Friday. This corresponds to a major pickup from the 0.1% expansion recorded by Germany in the three months to September. Economists polled by Reuters had expected to see 0.3 per cent growth.

It is unclear at this point how the surprisingly strong GDP print will change expectations for this year and next. We can, however, wager on it that analysts will continue to forecast more muted growth. GDP level has more or less reached the potential output level therefore the output gap has closed. As a result, it can be expected that Hungary’s growth will "snuggle up" to potential growth, which could be about 1.5-2.0%.

Vivien Barczel and Gergely Ürmössy, Budapest-based analysts at Erste also believe that GDP growth rate may decelerate to 2.1% yr/yr in 2015 and to 1.9% yr/yr in 2016. Key sectors of 2014, i.e. agriculture, industry and the construction sector have already showed signs of deceleration at the end of last year, and the slowdown is expected to continue this year too. The contribution from these sectors to GDP growth is expected to be smaller than in 2014. The economists reminded that both the Economy Ministry and the National Bank of Hungary (MNB) are of the same view, as both project smaller growth in 2015 than last year.

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