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Promising numbers as the year closes

The latest output and CPI figures have analysts predicting impressive growth for this year and a flat base interest rate for next.

Industrial production: Shown is the volume index of industrial production. The corresponding period of the previous year = 100. (Source: Central Statistical Office)

With better than expected industrial output figures in October, the 3% growth projection for the full year is now becoming increasingly likely, analysts say. Last month, inflation picked up slightly, so the base rate is likely to stay at its current level for an extended period of time.

Hungary’s industrial sector recorded double-digit growth in October: The year-on-year increase was a workday adjusted 12.7%, which was helped by the low base, as last October saw poor industrial output figures. Without the adjustment, the growth was still 10.1% this October.

This number (which is a first estimate, final figures will follow on December 14) is much better than an average October figure that has been recorded since 2000, and is the strongest October y.o.y. growth rate since that year. It was also significantly stronger than the consensus forecast of 7.8%, and thus resulted in the biggest October forecast surprise since 2001.

Industrial output increased by 7.1% in the first ten months of this year compared to the same period of 2014. As seen in previous months, the main drive behind the figure was the good performance of the automotive industry. October was the third month in a row when the growth rate was above 10%. As it now looks like the Volkswagen emission scandal didn’t have a lasting effect on the sector, industrial output might continue to grow in the upcoming two months of the year, reaching a yearly growth rate of 7.5%, thus balancing the poorly performing agricultural sector, said Takarékbank analyst Gergely Suppan. It might result, he predicts, in a yearly GDP growth of 3%.

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KSH has also released its consumer price index for November. Hungary’s y.o.y. headline consumer price index rose to 0.5% in November from October’s 0.1%, whereas core inflation moderated to 1.4% y.o.y. (seasonally adjusted) from 1.5%, although this index has been largely unchanged since April, signaling the lack of inflationary pressures. The annual headline CPI failed to reach the previous market consensus of 0.7%.

Analysts took all this news as encouraging. “In spite of the smaller-than-expected rebound, we continue to see inflationary pressure building up within the economy as prices of unprocessed food keep on increasing, which is likely to put an upward pressure on processed food next year,” Vivien Barczel and Gergely Ürmössy, analysts with Erste, said. “In addition, prices of durable goods keep on rising at an accelerated pace. Since the components of the durable goods group consist mostly of imported products, the prevailing demand for the products – which is reflected by the pick-up in retail sales – allow companies to build in the exchange rate changes in their pricing decisions,” the Erste analysts added.

William Jackson from London-based Capital Economics said its forecast was 0.6%. “However, we doubt this slightly softer CPI figure will prompt the National Bank’s MPC [Monetary Policy Council] to take a more dovish stance,” he said in a statement. “To start with, inflation now appears to be on an upward trend – consumer prices rose by just 0.1% y.o.y. in October. Moreover, the economy appears to be strong – industrial production figures showed that output rose by a whopping 12.7% y.o.y. in October. The upshot is that we expect monetary conditions to remain extremely loose into 2017, but for now we don’t see room for additional policy easing.”

Barclays, also London-based, saw reasons to be positive. “We view the data releases as good news for the economy as industrial output growth was unusually strong for October,” it noted in its reaction to the releases. “Clearly, inflation is still well below the target, but if the strength seen in today’s industrial output release is reflective of Q3 real GDP growth figures, the National Bank of Hungary (MNB) may well maintain its monetary policy stance for now.”

The MNB will release its latest macro forecast next week, and it is very likely to see significant revisions.

In spite of the good figures, some worry about the future of the Hungarian economy, saying that there is no “plan B” in case European Union money taps are turned off for any reason. The Fiscal Responsibility Institute Budapest (FRIB) warned in a presentation that there are serious deficiencies regarding the measurement of capital and labor, which in turn raises serious questions about the official figures on Hungary’s economic performance. In its publication, the institute said investments were falling and employees were leaving the country in ever-greater numbers, therefore potential growth was diminishing gradually. The authors warned that the Hungarian economy is currently “overheated” and if EU funding dries up the budget and the entire economy will be in trouble too.