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Industry Picks up the Pace, and so Does Inflation

Analysis

Industrial production picked up in February, much to the surprise of many analysts. However, they expect a slowdown to follow, due to the COVID-restrictions introduced in March.

Hungarian industry has started to show vital signs of life at last: in February, the volume of industrial production grew by 1.9% year-on-year while, based on working-day adjusted data, production rose by 3.9%, the latest data issued by the Central Statistical Office (KSH) shows. Industrial output was 4.8% higher, compared to the previous month, according to seasonally and working-day adjusted data.

The majority of the manufacturing subsections contributed to the growth, KSH noted. The manufacture of computer, electronic and optical products grew and, at the same time, although transport equipment (representing the largest weight) dropped to a greater extent, food products, beverages and tobacco declined in a lesser degree.

In spite of the promising developments, production was 2.3% lower in the first two months of the year than in the same period of the previous year.

Industrial output in February, according both to seasonally- and working-day adjusted indices, was 4.8% above the level of the previous month, and rose by 67% compared to the nadir of April 2020, surpassing even the pre-pandemic peak.

Analysts were satisfied with the latest industrial data; however, there is no consensus about the degree of contribution the first quarter industrial output might make to overall economic growth.

Above Expectation

Growth had surpassed expectations, said Takarékbank head analyst Gergely Suppan, adding that stabilization might continue in the coming months. March might even see additional momentum as car makers restarted production. Delayed demand can already be detected, so the industry will likely gradually pick up in the coming months.

According to Suppan, this year’s annual growth might be as high as 16% due to low base effects and new capacities and in April does not exclude outstanding growth of 65%. Industrial production might, therefore, contribute more than three percentage points to GDP growth, the analyst said.

Not everyone shares his view, though: ING Bank head analyst Péter Virovácz thinks there is a chance that, in spite of the promising industrial performance, first quarter GDP will shrink because industrial output shrank by 2.3% in the first two months of the year on a year-on-year basis. Even so, the February performance was beyond expectations.

Virovácz says the microchip and semiconductor shortage carries a great deal of uncertainty, therefore reaching full capacity in the automotive industry might take months. However, his expectations are for gradually expanding industrial production this year, which will thus support economic recovery.

Less enthusiastic about the February industrial data was Gábor Regős, head of the macroeconomics division at Századvég Economic Research Co.: he emphasized that the February growth is only positive in the light of the microchip shortage in the automotive industry, and also a positive sign that most of the segments produced growth.

Due to the low base effect, industry will produce significant growth in the coming months; however, a lot depends on the pandemic situation. In the long run, high investment volume might contribute to the growth, he added.

Faster Inflation

In the meantime, inflation further accelerated in March: prices increased by 3.7% on an annual basis, while in one month, consumer prices increased by 0.7% on average. Annually, food prices were up by 2.7%, within which the price of edible oil jumped by 21.3%, flour was up by 8.2%, sugar prices rose by 7.6%, rice prices by 6.8%, the price of meals at canteens by 6.6% and egg prices by 6.4%.

A price decrease of 7.8% was recorded for pork and there was a 1.9% fall for cheese. Alcoholic beverages and tobacco became on average 10.3% more expensive, within which tobacco was up by 17.5%. Shoppers paid 3.6% more for consumer durables.

On the month, March consumer prices increased by 0.7% on average compared to February 2021. Food became 0.4% more expensive, within which eggs were up by 2.7%, edible oil by 1.6% and poultry meat up 1.4%, while pasta products were down 1.3% and salami, sausages and ham were 1.1% less for consumers. Alcoholic beverages and tobacco prices went up by 1.3% on average, within which tobacco prices rose by 2.1%. Motor fuel prices were 6.6% higher.

In January-March 2021, consumer prices rose by 3.2% for all households on average, compared to the same period of previous year, and by 3.1% among pensioner households.

Analysts expect inflation to further accelerate in the foreseeable future. Suppan of Takarékbank said that April inflation might jump above 5% due to further increases in fuel prices and a higher excise tax, but will fall back below 4% by the summer months. As for the full year, he expects annual average inflation to come to 3.9-4%.

ING’s Virovácz also thinks that CPI might go above 5% temporarily, but will return to the national bank’s tolerance band 3% +/- one percentage point and he calculates an average of 4% annual inflation in 2021. Dávid Németh, head analyst at K&H Bank, thinks that annual inflation will be around 3.8%.

Numbers to Watch in the Coming Weeks

The Central Statistical Office will publish March labor market data on April 28. The next day, February earnings data will come out, followed by March industrial producer prices on April 30.

This article was first published in the Budapest Business Journal print issue of  April 23, 2021.

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