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Third Quarter GDP Given Large Upward Revision

The marked upward revision of the third quarter GDP data surprised analysts, but some still doubt that this year’s growth rate will reach 4%, a number the government has consistently targeted in its communications.

 There was a 0.3 percentage point upward revision in the third quarter gross domestic product data, lifting the growth to an annual 3.9%, according to a second reading of unadjusted data issued by the Central Statistical Office (KSH) at the beginning of December. Seasonally and calendar-year-adjusted data showed growth of 4.1% in Q3. Both figures were revised up 0.3 percentage points from the first reading, mainly due to market-based services which performed better than expected, KSH said. 
Compared to the previous quarter, the Hungarian economy expanded by 0.9%, and showed a 3.8% increase in the first three quarters compared to the same period of 2016. The growth was mainly driven by domestic consumption and demand, the main contributors being industry and construction, home building and investments. 
It is worth noting that while Hungary’s 3.9% growth is outstanding compared to the 2.5% EU average, when it comes to regional comparison, only Slovakia produced slower growth at 3.4%. Eurostat data reveals that regional peers all registered more dynamic expansion, the economies of Poland and Czech Republic both grew 5% on a yearly basis, Romania is again at the top with its 8.6% growth. Bulgaria’s GDP growth rate was also 3.9% in the third quarter. 
The Hungarian Government’s official target for GDP growth this year is still 4.1%. Those outside government circles are a bit less optimistic: the European Commission, for example, recently projected this year’s GDP growth for Hungary at 3.7%, and the IMF growth projection is only 3.2% for the full year 2017, as published in its November regional economic outlook for Europe.

A Struggle for 4%?

While the degree of upward revision of Q3’s GDP surprised analysts, most of them still think that this year’s figure will not reach the 4%.
ING Bank analyst Péter Virovácz projects GDP growth of 4.2% in the final quarter of the year, but still thinks that the full-year data will remain slightly below 4%. 
Dávid Németh, head analyst at K&H Bank mainly contributed the Q3 growth to market services, and also to industrial production, while he noted that agriculture had again held back growth somewhat due to the unpredictable nature of the sector. According to Németh, the Hungarian economy could expand by 3.9% this year, due to domestic consumption and industrial output, along with EU funding. He estimates GDP growth of 3.5% for next year. 
Erste Bank has raised its 2017 growth forecast to 3.9% for the full year, up from its previous 3.7%, in a reaction to the statistically large KSH revision, Gergely Ürmössy, the bank’s analyst said. He expects 3.5% growth for 2018. He also attributed the Q3 increase to domestic consumption and investments on the demand side, while on the production side, services, constructions and industrial output were the driving forces. 

Industrial Output Strengthens

The livening industrial output could indeed yet lift this year’s GDP growth rate further. According to the KSH data, the industry performed above expectation in October, producing a 7.6% increase from the same period of the last year. It also picked up from a 5.4% increase in the previous month, according to a second reading of KSH data (which on this occasion remained the same as the first reading).
The index adjusted for working days was equal to the non-adjusted one. Output grew by 5.4% in the first ten months of 2017 compared to the same period of the previous year. Industrial output – according to the seasonally and working-day adjusted index – was above the level of the previous month by 1.2%.
The volume of industrial export sales increased by 9.3% compared to the same period of the previous year. Industrial domestic sales grew by 6%; within this, the domestic sales of manufacturing were 10.2% higher year-on-year.
Of the various sections of industry, production rose by 8.2% in manufacturing, representing a decisive weight (96%), and by 48% in mining and quarrying, which have little weight. The output of the energy industry (electricity, gas, steam and air-conditioning supply) decreased by 0.8%.
According to Takarékbank analyst Gergely Suppan, industrial output is likely to remain dynamic in the coming months, which will greatly contribute to the GDP of 2017, which could therefore reach the 4% growth rate for the full year. As for industrial production, Suppan expects expansion of more than 5% for 2017, which could accelerate significantly next year. 
Analyst Péter Virovácz of ING Bank said industrial output could rise by 6% this year. Németh, of K&H Bank, thinks that industrial growth could be around 5.5% both in 2017 and 2018. Automotive production capacity is set to rise between 2018 and 2020, pushing growth higher, although he warned that the pace of expansion could be capped by labor shortages.

Numbers in the News

In the remaining few weeks of the year, only a few pieces of important macro data will be published. One of these is the October performance of the construction sector, due out today (December 15). The second estimate for October retail trade will be released a few days later, and earnings data for the January-October period will follow on December 20. We start the New Year with the balance of the general government sector in the third quarter of 2017, to be published on January 3. Data on the labor market between September and November will be released on January 4, and the first estimate of November’s industrial output will come out on January 8.