Poor Year-end Industrial Production Catches Analysts by Surprise

Automotive

Hungary’s industrial production fell back in the last month of 2019, causing analysts to worry about its contribution to economic expansion last year. While there are clearly some positive sings for better performance in the future, only time will tell whether the setback is temporary.

Industrial production fell a working-day-adjusted 3.7% year-on-year in December, contrasting with November’s 5.7% rise, according to a first estimate by the Hungarian Central Statistical Office (KSH). Raw data came to 1.2% on a year-on-year basis, while working-day and seasonally adjusted data shows a 3.8% contraction from the previous month. As for the full year, industrial output grew by 5.4% in 2019, following a 3.5% increase in 2018.  

The December figure came as shocking news for analysts. The last time Hungary saw such a poor performance was in November 2012, state news agency MTI quoted ING Bank head analyst Péter Virovácz as saying. He described the latest data as a huge negative surprise, and said that it was unambiguously caused by automotive sector where the KSH registered a massive production set back in the last month of the year, adding that other sectors were unable to balance this out.  

According to Virovácz, the fourth quarter performance of the Hungarian industry clearly indicates that the negative tendencies in the industrial performance of advanced economies have finally reached Hungary, therefore it is becoming less likely that the weaker performance is only a temporary phenomenon. The significant fall back in the order stock also points to this direction, he added.  

The poor performance could also point to slower GDP growth in the fourth quarter, and, according to the analyst, the annual GDP growth thus might be closer to 4% than the 5% that had previously been expected.  

The worse-than-expected performance of the Hungarian industry is not entirely surprising in light of the worsening external environment, especially the struggling German economy, said Gábor Regős, analyst at Századvég research institute.  

Due to the high investment ratio, the Hungarian industry was able to perform outstandingly, however, next few months’ data will reveal whether the current slowdown is only temporary, or is here to stay, he said.  

Regős also warned that it is not wise to draw conclusions from a single month’s data, especially when that month is December, as the last month of the year is traditionally the weakest of the 12.  

Shocking Setback

Gergely Suppan, head analyst at Takarékbank described the setback as “shocking”, and calculates with a 1.2% decrease in the industrial output in the fourth quarter from Q3. He also predicts that the annual increase in production was 2.8% in the Q4, slowing from 7.8% in the third quarter.

Thus, industry will significantly hold back the expansion of the Hungarian economy, he believes, predicting that Q4 GDP growth might have been closer to 4%, down from 5% in the third quarter.

Suppan, however, is more optimistic regarding the upcoming months, predicting a strengthening industrial performance. His optimism is partly based on the fact the first phase of the U.S.-China trade agreement has been signed and therefore the outlook for the German economy (and indeed for all Europe) has become better. However, the coronavirus threat might impact Hungary’s industrial performance, he added.  

While she also called it a negative surprise, Orsolya Nyeste of Erste Bank thinks the outlook is not definite for the next few months. According to her, the fact that purchasing manager indices in the past months have not shown notable deterioration might suggest a positive correction for the near future.  

However, she called the 8.7% setback of the German industry a worrying sign. Altogether, uncertainties in the industrial segment are still there aplenty, and might get even worse with the spreading of the coronavirus. Thus, industry’s contribution to the economic growth might be smaller this year than it was in 2019, Nyeste concluded.  

The second estimate for December industrial production, which was published on the day this paper went to print, was basically unchanged. Detailed data shows that production decreased in all three sections of industry: by 1.4% in manufacturing (representing a decisive weight of 94%), by 0.9% in the energy industry (electricity, gas, steam and air-conditioning supply) and by 4.8% in mining and quarrying (having little overall weight).

There was a drop after a 14-month increase in the manufacture of transport equipment (representing the largest weight, as it accounts for 25% of manufacturing): in December the output was 10.4% lower than a year ago, the greatest fall among the sections. The volume of motor vehicles manufacturing declined by 19.5%, while the manufacture of parts and accessories for motor vehicles decreased by 0.7%.

Numbers to Watch in the Coming Weeks

Much-awaited data arrives today (Friday, February 14): the KSH publishes the flash estimate of the fourth quarter GDP. Also on St. Valentine’s Day, Fitch and Standard & Poor’s will publish their reviews of Hungary’s sovereign debt; will there be any love in the air for the Hungarian figures? On February 25, data from the construction sector will arrive, followed by the earnings statistics for the November-January period. Fourth quarter investment data will be released on February 27, together with the second estimate of the Q4 GDP data.

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