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Robust growth needed to reach GDP goals

Services, agriculture and household consumption were the main drivers behind Hungary’s second quarter growth figures, detailed gross domestic product (GDP) data released in the first week of September revealed. However, Hungary’s industry still performed poorly as industrial output further declined in July after another setback in June. Most analysts are sticking to their earlier growth projections though – some even raised it – but all agreed that a strong second half year is the key for meeting growth expectations for 2016.

Agriculture saved the day for Hungary’s GDP figures with a 13.4% yearly growth rate. 

Hungary’s GDP grew by 1.8% year-on-year (y.o.y.) in the second quarter of 2016, according to seasonally and working day-adjusted figures released by the Central Statistic Office (KSH) on September 6. The second reading data is 0.1 percentage point (ppt) higher than the preliminary figure. 

As an effect of high yields in agriculture, first quarter GDP data was revised by 0.2 percentage points to 1.1%, so the fallback in the growth rate is somewhat smaller than previously reported. Services contributed by 1.8 ppt, industry by 0.9 ppt and agriculture by 0.4 ppt to the 2.6% growth of GDP in the 2nd quarter of 2016.

The value added by services and industry grew in the second quarter by 3.3% and 3.9%, respectively, from the same period of last year.

Construction remained a drag ­– it decreased by 23.6% on a year-on-year basis. Agriculture saved the day with a 13.4% yearly growth rate. The role of the services sector is becoming increasingly dominant, which may be traced back – besides rising household consumption – to a good performance by the export of services, wrote. Due to bleak July industry figures, signs for Q3 industrial performance are not overly promising, the portal warned.

As for the second readings of industry data, the volume of industrial output in July fell by 4.7% y.o.y. The working-day adjusted production was essentially unchanged at –0.1%. In July 2016, the number of working days was two fewer than a year earlier. In the first seven months of the year, industrial production rose by 1.3% compared to the same period of the previous year, according the KSH data released on September 14.

Although the second quarter GDP data balanced the decrease in the first quarter, the overall growth was only 1.4% on average in the January-June period. In order to meet the 2.8% annual growth rate forecast by the Central Bank of Hungary, therefore, a very good performance is needed in the remaining months of the year.

Commerzbank analyst Tatha Ghose was among those who did revise his forecast. The London-based analyst lowered his 2.2% annual growth rate prediction to 1.6% in a reaction to the fresh industrial data. “After today’s weak July manufacturing data – output down 0.6% m/m following the 2.4% m/m decline of June – we lower our 2016 GDP growth forecast from 2.2% to 1.6% and our 2017 forecast from 2.8% to 2.5%,” he wrote in a note.

According to him, EU funding itself is not enough to reverse the tendencies in the industry. “In Hungary’s case, the [industrial] output level has been flat all year on average, with gains since 2014 almost entirely reversed. In our view, all this is unlikely to be fully reversed simply because EU funding will pick up during H2 2016. We have to take a more cautious view of the regional cycle itself, especially with respect to new orders within the auto sector,” he said.

“Robust consumption growth, the upward revision in agriculture performance and higher value added by industry suggests that 2016 GDP may slightly exceed our forecast of 2.1%,” quoted Eszter Gárgyán of Citibank as saying. Gárgyán, however, warned that weak July industrial output does pose downside risks to growth in H2, and overall annual growth is still likely to lag behind the MNB’s 2016 GDP forecast of 2.8% from June.

Gergely Ürmössy of Erste Bank said that it had raised their previous annual growth projection of 2% to 2.1%, adding that household consumption will remain the drive for GDP growth in the following months.

 Consumption and exports will be the backbone of growth this year, Péter Virovácz, head analyst at ING Bank told national news agency MTI. He still expects a 2.2% growth rate for this year, but added that the upward revision of first quarter figures increased the possibility that actual growth would be even higher. Virovácz thinks that robust growth needs to be produced in the second quarter to reach the 2.5-3% range projected by the Economy Ministry and the central bank. In order to achieve that, investments must be kick-started, he emphasized.

Numbers to watch in the coming weeks

The macroeconomic calendar for the next two weeks is not particularly busy. Standard & Poor’s is expected to publish its review on Hungary on September 16, and this is sure to be watched closely. According to analysts, the best-case scenario will be an improvement in the country’s outlook, but an actual upgrade is highly unlikely. Hungary’s rating at S&P is currently BB+ with a stable outlook. Other than this, earnings for the January-July period will be published on September 20, and retail trade figures for July will be released on September 23. KSH will release employment and unemployment data for the June-August period on September 27