Industrial Production Jumps, as Does Inflation
While industrial output showed a significant increase year-on-year in April, the month-on-month decrease surprised analysts and is also a warning sign that downside risks persist.
Benefiting from an extremely low base effect, Hungary’s unadjusted industrial output grew by an annual 58.8% in April, according to a second reading of data published by the Central Statistical Office (KSH) on June 14.
Adjusted for workday effects, output was up by 59.2%. On a monthly basis, however, according to seasonally and working-day adjusted data, industrial output was 3.2% lower than in March 2021. All in all, the production volume slightly surpassed the pre-pandemic April 2019 level.
In January-April 2021, compared to the same period of the previous year, industrial production increased by 13.8%. According to KSH, the volume of export sales (representing 65% of all sales) grew by 18.4%, and domestic sales (accounting for 35% of all sales) rose by 7.9%.
In the regions, volume increases of between 5.7% and 22% were recorded, the highest growth being observed in Northern Hungary.
Detailed data shows that all segments were catching up: the volume of industrial export was above the previous year’s level by 84%. Transport equipment exports, representing a 33% weight within export sales in manufacturing, went up more than fourfold, while exports of computer, electronic and optical products, accounting for a 14% weight, grew by 51%.
Industrial domestic sales rose by 24.5%, while domestic sales in manufacturing were 27% higher compared to the same month of the previous year.
Within industry, production increased by 63% in manufacturing (representing the decisive weight of 96%), while it declined by 2% in the much smaller weighted mining and quarrying segment. The output of the energy industry (electricity, gas, steam, and air-conditioning supply) grew by 10.4%, primarily due to the colder weather compared with the previous year.
Transport equipment, representing the greatest weight within manufacturing output at 27%, grew the most, nearly four and a half times year-on-year. The outstanding performance is primarily the result of the low base value caused by factory shutdowns in the April of the previous year. The production value of the manufacture of motor vehicles increased almost 14 times, while that of the manufacture of parts and accessories for motor vehicles more than tripled.
While the year-on-year growth was massive, the fact that industrial production fell back by 3.2% from the previous months was a negative surprise for analysts.
“It seems that the ‘Ever Given’ accident in the Suez Canal in March showed its effects on supply chains and in factories in April. As industrial data in Germany were also disappointing, we can say that there are global tendencies behind Hungary’s weak performance,” ING Bank senior analyst Péter Virovácz said, commenting on the data.
Virovácz expects stable but moderate growth in the coming months, but this could be modified if supply chains break or if difficulties in purchasing raw materials intensify. As for the full year, he forecasts double-digit growth.
Industry would have picked up again in May, following a month-on-month decrease in April, said Takarékbank analyst Gergely Suppan. According to him, the sector had already left the crisis behind last October. The extremely high purchasing managers’ indices in Germany in March and in the Euro area in May also validate the belief that Hungary’s industrial production will perform a notable month-on-month growth in the near future, he added.
April industrial data showed a mixed picture according to Gábor Regős, head of macroeconomics at Századvég Zrt. The significant year-on-year increase is mainly caused by the extremely low base effect; even so, its extent is still below expectations.
“As for the decrease in month-on-month production, it is still a question whether it was caused by the shortage of [micro]chips in the automotive industry, by the intensifying pandemic, or whether it was persistent,” he noted. However, he expects that industrial production will contribute positively to economic growth this year.
K&H Bank head analyst Dávid Németh thinks that, similarly to the April data, May will also show a massive increase, still due to the low base effect. According to the analyst, the sector might close the year with a 10% annual expansion, as opposed to the 6% setback it suffered last year.
The KSH also published inflation figures for May. Consumer prices were 5.1% higher on average in May 2021 than a year earlier. In one month, compared to April 2021, consumer prices increased by 0.5% on average.
It was a positive surprise, as analysts expected a further acceleration in the consumer price index. However, they do not expect inflation to return to the 3% plus or minus 1% tolerance band set by the National Bank of Hungary (MNB) anytime soon.
As for the remainder of the year, the inflation rate might stay above 4%, putting the annual CPI at around 4.4%, according to ING’s Virovácz. Gergely Suppan noted that core inflation jumped to 3.4% from 3.1%, which shows a forming inflationary pressure.
All this might force the MNB to tighten monetary policy. This was reinforced by the central bank’s Governor György Matolcsy, who said that the MNB could raise its key interest rate in June at a recent conference. He emphasized that a prolonged rise in inflation could put the economic recovery at risk and said the economy could weather a rate rise.
Numbers to Watch in the Coming Weeks
With no significant macroeconomic data expected in the next two weeks, all eyes are on the next rate-setting meeting of the Monetary Council on June 22. The base rate, which was lowered to 0.6% nearly a year ago, is expected to be lifted due to the mounting inflationary pressure.
This article was first published in the Budapest Business Journal print issue of June 18, 2021.
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