In six of the last 10 months, industrial performance stagnated or decreased compared to the previous month, so it is no wonder that production (calendar-adjusted) is 4.1% lower than a year ago. Considering this, it is almost good news that the last three months as a whole did not bring a decline in the sector, which has been in recession for nearly two years. Even so, the August decline strongly worsens the meaning of this.
According to the second detailed reading of the data by the Central Statistical Office (KSH), the volume of industrial production dropped in August 2024 by 9.5%; based on working-day adjusted data, production declined by 4.1%, year-on-year.
Compared to crude data from the first reading, the significant difference is due to the fact that there were two fewer working days in this month than in August 2023. According to seasonally and working-day adjusted data, industrial output was 0.5% lower than in July 2024.
Production volume fell in August 2024 in the vast majority of manufacturing subsections and grew in only three. The best-performing rate was found in the manufacture ofchemicals and chemical products.
Looking across the whole of the first eight months of the year, production was 3.8% lower than in the same period of 2023.
In light of the July-August data, we can justifiably say that the third quarter did not bring about a significant turnaround in the industry.
While the industry continues to suffer, inflation fell into the target range of the National Bank of Hungary (MNB) of 2-4% for the first time in three and a half years: in September, consumer prices increased by 3% on average compared to the same month of the previous year. Over one month, they decreased by 0.1% on average, within which motor fuels became 3.7% cheaper.
According to analysts, we most likely saw the bottom of the inflationary curve in September, and the road from here is up regarding the rate of monetary deterioration. There is a unanimous opinion among analysts that if you pair the latest inflation figure with the current HUF exchange rate, it does not leave the MNB room to cut interest rates further.
“The service sector accounts for nearly three-quarters of the 3% inflation calculated on an annual basis. As in developed and regional countries, this item is still responsible for a significant part of inflation,” notes ING Bank analyst Péter Virovácz.
“This is important because this type of inflation is more sticky than the price effect of items outside the core inflation basket. Looking ahead, we can expect a substantial rise in inflation rates next month.” Virovácz expects an average price increase of 3.8% this year and 4% next.
According to Gábor Regős of Gránit Alapkezelő, inflation is expected to rise in the coming months: base effects and rising oil prices due to the Middle East conflict will have a negative impact. Having said that, while for a long time, the question was whether inflation would exceed the 5% level by the end of the year, the probability of this has now decreased significantly.
Looking at the year as a whole, inflation maybe 3.7-3.8%, while next year it may remain slightly below the top of the central bank’s target range, Regős says.
“For the time being, inflation remaining within the target band is a temporary phenomenon,” János Nagy of Erste Bank warns. “The base effect is quite unfavorable for the rest of the year. In the coming months, the biggest question is how much room the economy, which is starting to recover after a year and a half recession, will allow for further price corrections at the end of the year,” he adds.
He expects rising inflation for the rest of this year, reaching 4-4.5% by December. According to Nagy’s expectations, a downward trajectory could start again next year, but inflation may return consistently to the MNB’s target band only in the second half of 2025.
While it may arise that the central bank could be more relaxed than expected at the next meeting, core inflation, which was close to 5% in September, and the weakening of the forint should orient the National Bank of Hungary towards holding the current rates, Márta Balog-Béki, head analyst at MBH Bank, believes
“For this year, we continue to expect average annual inflation of 3.8%. After the favorable data releases in August and September, annual inflation may rise again by the end of the year, primarily due to the very low base. By the end of the year, the headline index is still expected to be around 4.5%,” she says.
Like Nagy, she says some disinflation can be forecast for the beginning of 2025, but the likely pace of returning to the inflation target will be a slow process. The development of core inflation does not suggest that inflation could easily be reduced to 3% next year. The dynamics of wage increases may remain relatively high until 2026, which may also pressure inflation. Balog-Béki expects the central bank’s 3% inflation target to be stably and sustainably achieved only in the second half of 2026, almost a year behind Nagy’s prediction.
This article was first published in the Budapest Business Journal print issue of October 18, 2024.
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