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Analysts: Industrial Production to Pick up by Yearend

Analysis

It seems that the second wave of the novel coronavirus pandemic is here, while the economy is still suffering from the symptoms of the spring lockdown, as July’s industrial figures show. Market experts are optimistic, though, expecting that industry will catch up by the end of the year.

Analysts are expecting a great improvement in the August industrial output, after July data shows that Hungary’s industrial production fell back by 8.1% on a yearly basis.  

The degree of fall was 28.8 percentage points less than the nadir of April, according to the second estimate issued by the Central Statistical Office (KSH). Based on working-day adjusted data, production dropped by 7.7%. The effects of the altered economic processes caused by the coronavirus epidemic were still perceptible in this period.

Industrial output in July, according to both seasonally and working-day adjusted indices, was 7.2% above the level of the previous month, and grew by 46% compared to April.

Within industry, production fell by 8% in manufacturing, representing the decisive weight of 96%, and by 31% in the much less significant mining and quarrying sector. The output of the energy industry (electricity, gas, steam and air-conditioning supply) declined by 4.1%.

For the period January-July, industrial output dropped by an annual 12.1%. According to analysts, industrial production has been gradually recovering from its April low point.

Significant Potential

ING Bank senior analyst Péter Virovácz says that Hungary’s economic performance is continuing to improve and emphasized that the industrial sector still has significant potential. Production volume is down at a level similar to that of the second half of 2017, he noted.

The usual summer shutdowns took place in some factories in July, which could explain why KSH is still reporting an output drop in the vehicle manufacturing segment, he added. In August, production could fall further thanks to continuing temporary stops at factories.

The biggest question is how might possible temporary shutdowns, due to the strong spread of the virus, affect supply chains in Europe, he said. As he noted that the volume of new orders is encouraging, so if everything goes well, industry will reach pre-crisis level by the end of the year.

Dávid Németh, senior analyst at K&H Bank, projects that industrial production is gradually recovering from a low point in April, when lockdown measures halted most production. Although the pace of recovery has slowed a little, data might have been affected by high base effects.

According to him, things are still uncertain due to the pandemic and it is not clear what effect it will have on exports and how domestic consumption could step in to support lower foreign demand. Industrial output for the year could be down by a single digit number, he cautions, but growth could start again in 2021.

Delayed Consumption

The recovery is likely to continue in the coming months, although demand will only liven gradually, due to lower wages and cautious consumers, says Takarékbank chief analyst Gergely Suppan. Later, on the other hand, delayed consumption will show, therefore industrial output will gradually pick up in the rest of the year.  

But if there is a more severe second wave of the pandemic, it will surely slow down the recovery process, Suppan warns; however, due to the better preparedness of the healthcare sector, he does not expect further lockdowns.

He said industrial production could fall this year by around 7% but in 2021, because of the low base affect, it could rise by 13-14%. For April 2021, he forecasts a growth rate of as high as 60% as production plummeted this year in April.

Orsolya Nyeste, head analyst at Erste Bank, says the July data was actually a positive surprise for her, as she had calculated with a 9.5% working-day adjusted setback, rather than the 7.7% decline KSH reported. She thinks that industrial output further improved in August, but she also drew attention to uncertainties in the longer run, as the economic damage the second wave might cause are as yet unknown known.  

Dániel Molnár, macroeconomics analyst at research institute Századvég Gazdaságkutató, also expected a steeper decline in July, and he also noted that the latest data shows a gradual recovery after the low-point of April. He also said there are an increase in orders in manufacturing in Germany, which is a good sign for the Hungarian industry. According to him, industrial production might be on the rise in the rest of the year, although he also named the second wave of the pandemic as a risk factor.

Numbers to Watch in the Coming Weeks

On September 29, KSH will publish detailed data on the labor market, as unemployment and employment figures of the June-August period will come out. The next day, January-July earnings data will be released, while export and import activities in July will come into attention on October 2.

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