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Construction Boom Finally Visible

Several important pieces of macro data were published in the previous weeks, of which several surprised analysts. For one, the Hungarian construction sector can boast an eight-year record in production. 

The volume of construction output grew 36.8% in August from the same period a year ago, the Central Statistical Office (KSH) reported. Output increased in both main groups of the area: by 46.8% in the construction of buildings and by 24.1% in that of civil engineering works. Compared to the previous month, and based on seasonally and working day adjusted indices, construction output grew by 9.8% in August.   

Growth in the construction of buildings was primarily the result of industrial and warehouse buildings and, to a lesser extent, sports facilities, as well as educational and residential building. In the case of civil engineering works, the production grew from a low base, and as a result of road, railway and utility construction works.

Good news for the future is that the volume of new contracts increased by 46% compared to the same period of the previous year. Within this, the volume of new contracts concluded grew by 95.4% for the construction of buildings, and by 18.9% for civil engineering works. New contracts were concluded mainly for the construction of industrial buildings and, to a lesser extent, housing and hotel buildings. 

Growth in civil engineering works was the result of contracts signed for railway development as well as utility and road construction.

Exceeding Expectations 

The performance of the sector exceeded expert predictions. Takarékbank analyst András Horváth noted that the better-than-expected data indicates a significant, 28% increase for the full year for the sector, but in the light of already announced developments and the high number of building permits, the growth could go even higher. In comparison, the construction sector contracted by more than 18% in 2016.

The sector may continue to expand at a robust pace, Minister for National Economy Mihály Varga said in reaction to the data revealed by the KSH.

The sector’s growth is being increasingly underpinned by the government’s family housing allowance scheme; the number of newly built homes was up 46% and the number of building permits increased more than 40% year-on-year in the observed period, he added.

The pace of growth was outstanding in August, and not only in historical terms, but also when compared to data from the V4 countries, and it is likely to place Hungary on top of the EU ranking when comparable data becomes available, Varga noted. Since 2010, output of the Hungarian construction sector has increased by more than 20%.

However, the rosy outlook for the sector is somewhat overshadowed by the lack of available workforce, analysts have pointed out. On the other hand, the number of people working in construction has increased lately, and is now at 298,000.  

Before the financial crisis, the sector employed 330,000 people.

CPI Surprise

The latest consumer price index was also something of a surprise to some analysts: inflation rose 2.5% year-on-year in September, slowing somewhat from a 2.6% increase in the previous month, according to KSH data.

Both domestic and emerging market analysts in London had expected the inflation rate to pick up to 2.7% in the last month of the summer.

Food prices rose by 3.1%, with the highest price rise of 6% on average was recorded for alcoholic beverages and tobacco.

Seasonally adjusted core inflation, which excludes volatile fuel and food prices, accelerated further in September, to 2.9%, the highest rate recorded since January 2014. In September 2017 compared to the previous month, consumer prices increased by 0.1% on average.

The surprise was caused by the further increase of the price of tobacco products, while the rest of the product groups behaved according to expectations, Takarékbank analyst Gergely Suppan, said. As for the rest of the year, the analyst expects inflation rate to hover around the current level, and it could even fall back to below 2.5% by the end of the year, due to the high base of fuel prices. On average, Suppan thinks consumer prices will increase 2.4% in 2017.

The KSH has also published a second reading of August’s industrial output, which is basically in accordance with the first reading, and shows that the volume of industrial output was 6.8% higher than a year earlier based on both working day-adjusted and non-adjusted indices. Output of the automotive sector grew 5% year-on-year in August after two months of decline.

This reading of the data proved previous assumptions that the poor figures of the past month were mainly caused by the summer stoppage falling in a different period than in the base year.

Numbers to watch in the coming weeks

The KSH will publish the second reading of retail trade data for August on October 24, after it reported a 4.6% year-on-year increase in the first reading. A few days later, the latest employment and unemployment figures will be released for the July-September period. In June-August, the unemployment rate was a record low of 4.2%, with 4.4 million people in employment. On November 3, KSH will come out with the number of construction permits in the first three quarters of the year.