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Industrial Output Overshadows Growth Expectations

Hungary’s automotive sector deflated somewhat in July, which had an immediate impact on the latest industrial performance figures. And while analysts believe that the setback is only temporary, the great dependence on a single sector does concern some experts. 

Hungary’s GDP grew by an annual 3.2% in the second quarter, slowing from 4.2% in Q1, the Central Statistical Office (KSH) said in a second reading of data on September 5, which was basically identical with the first reading. The primary contributor to the growth was market-based services. 

According to seasonally and calendar adjusted and reconciled data, the performance of the economy was up by 3.5% compared to the corresponding quarter of the previous year and by 0.9% compared to the previous quarter. In the first half of 2017, the volume of GDP grew by 3.6% compared to a year earlier.

The value added of industry grew by 3% on a yearly basis, within which that of manufacturing grew by 3.6% compared to the same period of the previous year. Within manufacturing, all branches with relatively large weight expanded, with the exception of the manufacture of transport equipment. Within industry, the increase of the performance of non-industrial activities exceeded that of industrial production. The performance of construction rose by 29%, with the highest increase within the division recorded for civil engineering. The value added of agriculture fall by 13% compared to the high base a year earlier. The gross value added of services was up by 2.8% in total.

Somewhat Slowed

The latest data suggests that the pace of growth is still fast, although somewhat slowed from the previous quarter. Strong external and internal demands define growth, which is also influenced by the low base of 2016, when, between funding cycles, European Union money was scarce. The overall European economy is performing relatively well, but it is still thought Hungary’s growth rate might be some 1.5-2 percentage points higher than that in the eurozone.

In terms of the structure of growth, there have been some notable changes in the past quarters. This year, unlike in 2016, construction is contributing significantly to GDP growth, and industry has also had a bigger impact on expansion than last year. Services are still stable drives for growth, but this year agriculture is hindering the performance of the Hungarian economy.

In the first quarter of the year, GDP growth was stimulated by the private sector, in addition to the increasing EU funding. However, the activity of the private sphere seemed to slacken in Q2, with the economy once again dependent on EU money. Whether the anticipated 4% economic growth for the full year can be achieved greatly depends on the temporary nature of the aforementioned shift in the growth pattern.

Even if the Hungarian economy can maintain a higher growth rate in the coming years, it will still take decades to catch up with the average EU GDP per capita based on purchasing power parity, experts warn.

Expectations Still High

While expectations for economic growth for this year are still high, the latest industrial production data might overshadow such hopes. According to the KSH, Hungary’s industry increased by only 0.2% year-on-year in July 2017, and the volume of industrial production in July – according to seasonally and working-day adjusted indices – was below the level of the previous month by 4.2%. Year-on-year, output went up by 4.8% in the first seven months of 2017.

The data disappointed many analysts. Erste Bank chief analyst Gergely Ürmössy said the July increase was well under expectations of a rise of around 7%. The slowdown may have been caused by scheduled summer shutdowns in the automotive industry, he said. According to Ürmössy, industrial output might be stabilized by the end of September and the upswing seen in the first half of the year is likely to continue. He expects a 5% increase for the full year.

TakarékBank analyst Gergely Suppan also suggested that shutdowns at local automotive plants may have taken place in July, rather than August. If this is the case, output could pick up markedly in August, he added.

“This data is the worst we had seen in the past three years, and when looking back to the last five years, there was only one month when the Hungarian industry showed a weaker performance,” Péter Virovácz, head analyst of ING Bank opined. He added that the poor July data, paired with the not very impressive retail trade figures, implies that we are likely to see worse than expected economic activity in the third-quarter of the year.

If detailed industrial figures justify that a setback in the automotive sector had indeed caused the poor performance of the industry, then we should start to worry about the country’s serious dependence on the automotive sector, Virovácz emphasized. The sector represents a 30% share in Hungary’s economy, so its swings have serious impacts on the GDP. “This reveals the dangers deriving from the one-sided nature of the Hungarian industry,” Virovácz added. 

Numbers to watch in the coming weeks

Inflation picked up a bit in the past few months, and KSH will reveal whether the trend continued in August on September 9. A few days later, a second readings of July’s industrial output will be released, from which we’ll learn how big of a role the automotive sector played in the poor industrial performance. On September 15, the KSH publishes construction data for July.