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Summer Heat Brings Slew of Positive Macro Numbers

Business confidence is record-high, wages are on the rise, and the construction sector continues its upswing that finally started a few months ago.

Summer has inevitably arrived, proof of which is Hungary’s nearly empty macroeconomic calendar in the past two weeks. Only two data sets worth talking about were released recently: one involves the construction sector output in May, the other is about wages in the January-May period. The construction sector continued its progress: the volume of output was 35.4% higher in May 2017 than the low base a year earlier, up from a 22% increase in April. According to the Ministry for National Economy, this is a 12-year record, and economy minister Mihály Varga attributed the growth mainly to the government’s home building program.

Parallel with faster absorption of European Union funds, the construction output was able to grow sustainably, and state investments also gave a boost to the sector, the ministry said in its comment. The performance of the sector shows that the Hungarian economy can steadily rely on the industry and the export activities, and also on the consumption-increasing effect of the six-year wage agreement signed at the beginning of the year, Varga noted.

Earnings up in May

Indeed, wage agreements had an impact on Hungarian earnings in May as well as in the first months of the year. In May 2017, average gross earnings amounted to HUF 296,100, 12.9% higher than a year earlier, the Central Statistical Office (KSH) reported.

In January–May, average gross earnings amounted to HUF 288,900. In the first five months of the year, both gross and net earnings grew by 12.1% compared to the same period of the previous year. Real wages were up 10.6% in May.

Rises of 15% in the minimum wage and 25% in the guaranteed minimum wage as well as salary adjustments affecting specific areas of the public sector and the employees of state-owned public service companies all had an impact on earnings growth.

Although slightly beyond expectations, gross wages still showed a significant increase in May, TakarékBank analyst András Horváth said in a comment. According to the analyst, it was mainly the lack of skilled workforce and the wage agreements that influenced May’s salaries. However, earnings in the private sector were only 11.9% higher in May than in the same month of 2016, down from a 12.9% year-on-year increase in April, while employees in the public sector earned 18.5% more in May than a year before, and there was still a massive 15% growth when public workers’ earnings are not counted in. Horváth expects earnings to be 13% higher this year on average on a year-on-year basis, due to wage arrangements and the missing workforce.

Inflation not Likely to Rise This Year

The National Bank of Hungary’s Monetary Policy Council (MPC) decided to leave its key rate unchanged at 0.9%, matching the market consensus, while O/N rates were also left unchanged, including the depo already in negative territory at -0.05%. The base rate has been kept unchanged for more than a year now.

In the council’s assessment, Hungarian economic growth will pick up over the forecast horizon. The MPC also noted that some degree of unused capacity has remained in the economy, but this is likely to be gradually absorbed as output grows more dynamically.

The MPC further said that the sustainable reaching of the inflation target, set at 3%, is not now expected until the beginning of 2019. For the shorter-term, the council noted that if inflation remains persistently below the target, “the council will stand ready to ease monetary conditions further using unconventional, targeted instruments”.

Based on the above statements, CIB Bank analysts expect the base rate to be kept unchanged for an extended period, that could last until 2018. “The council’s decision was in line with our expectations,” Equilor commented on the decision, highlighting the council’s comments that the consumer price index is likely to remain near its current level over the remainder of this year. “Earlier, rate setters expected inflation to slowly begin rising at the end of the year,” the investment service provider noted.

Business Confidence Soars

In the meantime, economic research institute GKI released its latest business confidence index. The combined gauge of consumer and business confidence of the think-tank rose to 4.2 points  in July, a historic high, from 3.2 points in the previous month; the business confidence index also rose to 11.3 points from 9.5 points. The outlook for the industrial and construction sectors improved, but it worsened slightly for trade and service companies.

The consumer confidence index slipped to -15.9 points from -14.6 points. Fear of unemployment slightly increased, as did inflation expectations. Households’ assessment of their own prospective financial positions worsened, but their ability to make savings was little changed.

Numbers to watch in the coming weeks
The first two weeks in August brings a bit more excitement in terms of macroeconomic data: first, on July 28, the KSH publishes the number of construction permits issued in the first six months of the year, giving an updated picture of the state of the construction sector. On August 3, the first estimates of retail trade figures will come out; the reference month is June. A day later, we’ll learn about the June performance of Hungary’s industry. Construction sector output – also for June – is to be released on August 10.