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Industry Failed to Boost Economic Growth

After two months of decline, industry returned to growth in November, albeit that the 0.6% year-on-year increase practically represents stagnation. On a monthly basis, industrial output was up 0.9% in November from the month before, making it the second month in a row that production was able to rise – in October, it was 2% higher than in September – but still considerably lower than in the fall of 2015. 

Minister of Foreign Affairs and Trade Péter Szijjártó with Latvian counterpart Edgars Rinkēvičs at a press conference in Budapest late last year. Hungary’s foreign trade figures have certainly given the minister cause to smile.

Again it was the sluggish auto industry that hindered growth and, with no major capacity expansions expected until 2018, full year data might be one of the weakest in the past few years. In the first 11 months of the year, industrial output was 1% up from the January-November period of 2015. When looking at data from that year, it turns out that output in the first 11 months of 2015 was 7.3% higher than a year earlier. December figures, to be published on February 7, will give a clearer picture of whether industrial output for the full year will be above or below 1%; however, taking the performance of the automotive industry into consideration, the latter is more likely. Not only the vehicle manufacturing is ailing, but other sectors also contributed to the poor November figures.

The relatively weak November data and the performance of the past months was quite unexpected, according to Takarékbank analyst Gergely Suppan. The purchasing manager index, an economic indicator derived from monthly surveys of private sector companies, rose sharply in September, and was outstandingly high in October and November (57 and 56.6 points, respectively), and Germany’s Ifo-index (another business climate indicator) was also high. All this projected a livening in industrial output, so it is very likely that individual factors caused the poor industry figures in November, says Suppan. He predicts that industrial performance will pick up in the coming months, based on domestic and European macro figures, however, he draws attention to the fact that Audi’s planned cutback in production might result in a more moderate growth rate. According to Suppan, growth rate for the full year might be 1.3-1.5%, and he estimates a 3.5-4% increase in 2017, partly due to the low base, but also because of the introduction of new capacities. He expects notable acceleration in 2018, with the appearance of significant new capacities in the automotive industry.

Another weak month in Hungary’s industrial output, was the comment of Gergely Ürmössy, head analyst with Erste Bank. The poor figure did not take him by surprise, as it is in harmony with the full-year performance of the sector. As export-oriented production represents a large portion within the industry, and Hungary’s most important export partner (Germany) is still ailing, there is little ground for optimism. As for 2017, the analyst expects a slow recovery, but it will fall significantly behind the 7-8% pace seen in 2014 and 2015. Ürmössy thinks the latest industrial figures back up his previous expectations for the full-year GDP growth in 2016, which he puts at around 2.1%.

In spite of the not-so-roaring industrial performance, the government hasn’t changed its forecast for Hungary’s GDP growth in 2016, and it remained at 2.1%. (Earlier last year, however, the government calculated with 2.5% GDP growth for 2016.)

Tax reductions

The year was closed with stable public finances, Minister for National Economy Mihály Varga said at a press conference at the beginning of January. Thanks to the government’s tax reductions and its successful fiscal policy, the deficit of the general government budget was kept low in 2016 and the government debt-GDP ratio could also be substantially reduced, Varga emphasized. That said, the central sub-sector of the state budget accumulated a preliminary deficit of HUF 848.3 billion last year, while it was only HUF 389 bln a year ago.

Based on this in December the budget deficit came to HUF 907 bln, which is the biggest ever monthly deficit in Hungary.

Hungarian foreign trade closed a record year in 2016 in every respect, Minister of Foreign Affairs and Trade Péter Szijjártó said at another press conference held in response to last year’s foreign trade data for January to November released by the Central Statistical Office.

Numbers to watch in the coming weeks

The first exciting data to watch is the December consumer price index released by the Central Statistical Office (KSH) on January 13, when it will also publish inflation figures for the full year. Expectations, both from the government and from analysts, is of 0.4 inflation for 2016. On January 16, we’ll find out whether the construction sector was able to recover in November, after output continued declining through the year. KSH will issue its statistics about earnings in the January-November period of 2016, and the second estimate of retail trade balance for November will come out on January 25.