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Economy Kick Starts in January

In the light of the latest macroeconomic data, there are good reasons for optimism: analysts now say that Hungary’s GDP growth could again exceed 4% in 2018, and many expect a two-digit growth rate in wages. However, some warn of inflationary pressure.

The Hungarian economy kicked off 2018 on a strong note with some better-than-expected data for the first few months. In January, retail trade grew a notable 7.5% from the same month in the past year, while industry produced a 6.9% increase year-on-year. Construction sector output was a whopping 43.2% higher than a year ago, tourism is soaring at a more than 10% increase in guest nights from the previous January, and even new car sales produced a remarkable result with a 38.5% yearly increase. 
Domestic consumption and investments also grew notably, which boosted imports, but exports have also grown dynamically. Based on all the good news, Takarékbank analyst Gergely Suppan predicts that the GDP growth in January could have exceeded 5.5% and might have even been close to 6%. For the full year, Suppan expects GDP growth of 4.5%, but he doesn’t exclude that it could grow even more.
The latest data to come to light was the second reading of January’s industrial output. The volume of industrial production increased by 6.9% year-on-year, the Central Statistical Office (KSH) reported in mid-March. There was no change compared to the data in the first estimate. The output – according to the seasonally and working-day adjusted index – was above the previous month’s level by 1.5%.
Within industry, production rose by 8.4% in manufacturing (representing a decisive, 95% weight) and by 94% in mining and quarrying (the latter having little weight, though). The output of the energy industry (electricity, gas, steam and air-conditioning supply) fell by 18.1%, mainly as a result of much warmer weather compared to the previous year. 

Continuing Trends

In light of the latest wage statistics, the positive trends in domestic consumption are thought likely to continue. The average gross monthly wage in Hungary grew by an annual 13.8% to HUF 310,800 in January, KSH reported on March 20.
Calculating with an annual inflation rate of 2.1%, real earnings increased by 11.5% in January. Excluding Hungarians in so-called “fostered” (public) work programs, the average gross wage increased by 12.7% to HUF 323,600. According to KSH, average gross earnings were highest in the financial and insurance sectors (HUF 570,000) and lowest (HUF 203,100) in accommodation and food service activities.
Commenting on the data, Minister for National Economy Mihály Varga told public television channel M1 that wages had risen for the 61st consecutive month, and the trend was likely to continue in the coming months. He noted that wage increases were most visible in the transport, warehousing, health and construction sectors.
Varga also said that wage hikes were partially the result of the six-year wage agreement the government signed with employees and unions in November 2016, however the rate of wage growth exceeded expectations. Varga also emphasized that average net wages, including family tax allowances, had increased to more than HUF 215,000 per month, and thus net wages have gained 62.3% since 2010.

Analysts Surprised

The extent of the growth also surprised analysts. The rate of the wage growth might slow a little from the second quarter of the year, but full year data is expected to lag behind last year’s only slightly, according to their unanimous opinion.
According to Péter Virovácz, head analyst at ING Bank, January’s wage data exceeded the 12% expansion the market expected and was mainly driven by the 8% and 12% increase in minimum wages for unskilled and skilled workers. The labor shortage could also be contributing to the wage hike. As for the rest of the year, Virovácz foresees a stronger increase in the first quarter, due to the low base effect; however, on average, he expects a double-digit wage increase.
Takarékbank analyst András Horváth agrees that the persistent labor shortage – especially in the area of skilled workforce –, the minimum wage increase, and the pay rise in the public sector all lifted the rate of the January wage increase above the previously expected level. Analysts at Takarékbank predict an annual wage hike of more than 9% for 2018. Paired with the expected annual inflation of 2.5%, that means more than 6% real wage growth for the full year. The pressure brought by the labor shortage could result in an even higher growth rate in wages.
K&H Bank head analyst Dávid Németh also predicts that the wage hike will continue through the year; he calculates with a net wage hike of about 10%, while real wages could go up by about 8% on a yearly basis. However, he warns that continuous and significant wage rises could pose a possible risk to the performance of the Hungarian economy.
For one thing, productivity must keep up the wage rise, otherwise the Hungarian economy could lose its competitive edge. And although it cannot be seen at the moment, inflationary pressure could also be a risk; namely, that increasing consumer consumption could lift prices sooner rather than later. On the other hand, companies now need to pay their employees more, and the rising expenses will likely force them to raise the price of their products and services. At the end of the day, this will also contribute to increasing inflation.

Numbers to Watch in the Coming Weeks

The next two weeks will not be all that exciting in terms of macroeconomic data. Employment and unemployment figures will be published on March 28, when KSH will be scrutinizing the December-February period. On April 5, the statistical office releases February retail trade data, followed by the first estimate of February’s industrial output figures.