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Construction sector lags

Without EU funding for state projects, the construction sector’s contribution to the GDP is in negative territory. In response to recent data, the OECD said it is cutting its growth projection for Hungary from 2.5% to 1.6%.

Monthly consumer price index. Corresponding period of previous year equals 100. (Source: Central Statistical Office)

Not surprisingly, the pale GDP growth figure in the first quarter of the year was mainly caused by a setback in industry and a massive contraction in construction – that’s what we learned from the detailed data published by the Central Statistical Office (KSH) on June 7.

The second estimate was basically the same as the first: The 0.9% year-on-year growth was confirmed. However, when looking at data adjusted seasonally and for calendar effects, the second reading of the yearly growth rate was put one percentage point lower than in the first estimate and came to 0.4%.

Getting into more detail, the value added by industry was down by 0.7% y.o.y. Of sub-sections with fairly significant weight, the manufacture of computer, electronic and optical products grew, while production of transport equipment dropped.

As for the value added by services, it produced a growth of 3%, with outstanding performance from the tourism and hospitality sector (6.4% growth), and household consumption also grew 4% from the same period of the past year.

The other drag in the figures was the construction sector, where performance fell by 28% on a year-on-year basis, with civil engineering decreasing most, due to a massive drop in state projects financed from EU funds.

Reacting to the data, the Organization for Economic Cooperation and Development (OECD) sharply cut its GDP growth projection for Hungary in its latest Economic Outlook: It now forecasts 1.6% growth for 2016, down from the 2.5% target it gave only a month ago. At the same time, however, it did lift its projection for 2017, up to 3.1%.

In spite of the setback in the first three months of the year, Hungary’s government still expects the economy to pick up in the second half of the year, stating that the slowdown was only temporary. This seems to be justified by the April industrial output figures: In a first reading, the volume of industrial output grew by 5.3% year-on-year, following a y.o.y. drop of 4.6% in March. Output has gained 24% since 2010, and some 10% since January 2014.

Not such good news

Not so good news came from the construction sector. Although the government noted in its reaction to the poor GDP figures that the soaring number of building permits also signals a positive trend, such trends are nowhere in sight yet, as April construction data shows that the sector contracted 29.8% from the same period of last year – March data revealed a 33.9% decrease on a yearly basis.

Another surprise hit analysts on June 8 when the May consumer price index was published by KSH. Inflation swung back to negative territory and came to -0.2% in May, while analysts asked by business site portfolio.hu had made a consensus prediction of 0.1% inflation for the period. Core inflation dropped to 1.3% on a yearly basis from 1.4% in April. KSH noted that motor fuel prices decreased significantly in May.

In spite of the government’s positive outlook for this year’s macro figures, Standard & Poor’s sees a less bright course for the country. S&Pʼs EMEA sovereign chief Moritz Kraemer said in a Reuters interview that S&P is unlikely to raise Hungary back to investment grade. The key factor holding back the rating now is the difficult predictability of policymaking, a weakened institutional framework and maybe also the dependence on transfers from the EU budget, which is very large. Kraemer also said that large European countries are questioning whether Hungary, which has effectively closed its borders to avoid a flood of Syrian refugees, should get such large amounts of EU funding given its “lack of solidarity” on the migrant issue. 

Things to watch in the coming weeks

There will be a relatively calm period in the next two weeks when it comes to KSH releases. On June 21, earnings for the January-April period will be published. The Monetary Policy Council of the National Bank of Hungary will hold its rate-setting meeting on June 21, but as the rate-cutting cycle of the MNB came to an end at its latest meeting, this time no surprises are expected. The MNB will also issue its Inflation Report on June 23, and KSH will publish retail trade figures for April on the following day. Unemployment figures for March-May will come out on June 28.