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Weak GDP figures surprise analysts

The drop in GDP surprised analysts, although poor construction and production figures should have provided them with a clue. 

Volume change of GDP compared to previous quarter – calendar and seasonal adjusted data. (Source: Central Statistical Office) 

The GDP figure released on May 13 was a huge surprise: While analysts’ consensus was growth of around 2%, first quarter data from the Central Statistical Office showed a 0.8% setback from the previous three months at the end of last year, and only a 0.5% increase from the same period of last year, based on seasonal and calendar-adjusted data. The unadjusted 12-month index, supported by the leap day, shows an output growth of 0.9%. The consensus at portfolio.hu was 2%, while Reuters and Bloomberg had even more optimistic expectations. The first estimate data therefore caused quite a surprise. 

The new data has some analysts wondering whether Hungary is headed for a recession, while others say the highly anticipated upgrade of the country’s sovereign debt rating may be delayed yet again this year.

“Hungary’s economy unexpectedly had its first quarterly contraction in four years after a plunge in European Union funding,” Bloomberg said in reaction to the numbers.

Only a day before Hungary’s Q1 GDP data came out, Bloomberg published its own survey of economic performance in the Eastern European region, including, in addition to Hungary, Czech Republic, Poland, Romania, and Slovakia. The news agency predicted a sluggish first quarter for the Czech, Hungarian, Polish and Slovak economies, and noted that Romanian fiscal easing boosted growth in the first quarter.

As for Hungary in particular, Bloomberg expected it would post the slowest growth rate, which it thought likely to come in at 2.4%.

But the slow down shouldn’t have come as a surprise: Both the latest industrial and construction data were very poor.

Hungary’s construction output, published on the very same day as the GDP figure, plunged by one-third in March: 6.3% month-on-month, and a massive, 33.9% year-on-year decline in March, and 27.6% year-on-year decline in the first three months of the year. This is also disappointing, especially as February’s construction data seemed to have brought the sector back to life. The main reason for the slow-down is still the diminishing EU funds. The outlook for the sector, however, improved a bit, as the volume of new contracts was 47.3% higher than the low base in the previous year.

Hungary’s industrial production also contracted for the fifth consecutive month in March. The volume of industrial production fell 4.6% year-on-year, according to raw data, to which the previous year’s high base also contributed.

Some see possible recession

“The slowdown in GDP growth in Central and South Eastern Europe in Q1 supports our view that the very rapid rates of expansion seen at the end of last year weren’t likely to last,” William Jackson at London-based Capital Economics said, adding that at a country level, the data confirmed that Hungary had made a very weak start to the year, while Romania was the region’s outperformer.

Jackson also mentioned the poorly performing construction industry, but noted that domestic consumption held up well, and then concluded that growth in the region should continue to average around 3% on a year-on-year basis this year.

Also from London, Peter Attard Montalto at Nomura stresses that “this is the lowest yearly growth since 2013 and the largest quarterly drop at -0.8% since the highest of the eurozone crisis in 2012.” Nomura’s forecast was 2.2%.

“We think it now opens up the very real possibility of a recession with another contraction in Q2, albeit smaller in size. Like Poland we suspect there was a much more sudden stop in investment activity on the EU structural fund story. However, more than that we think this GDP print illustrates central bank action with the Funding for Growth scheme and other facilities that are keeping the economy inflated,” Montalto said in a note. He also thinks that, in light of the latest data, the MNB will be forced to carry on with its rate cuts (he projects two more base rate cuts to 0.75%), and also believes that currency weakening will be more aggressive in this new lower growth context.

Montalto added that Nomura had downgraded its GDP growth forecast for this year, from the previous 2.6% to 1.5%, while it also cut back expectations for 2017 to 2.5% from 2.8%.

“Digesting such large surprises without a breakdown is difficult (hence why we usually wait), so further forecast revisions may well be likely in such a volatile growth environment. Wage growth picking up and fiscal loosening could provide some support, however,” Montalto said.

In the construction industry we trust

Hungary’s Economy Ministry projected GDP growth of 1.7% for the first quarter, and the much weaker figure was clearly a disappointment for the economy minister. Mihály Varga told public television M1 that growth was only temporarily low, and mentioned, as an example, that the stock of orders has already been rising in construction and was 60% higher y.o.y. in March. “Modest growth at the beginning of the year has been the consequence of the cyclicality of EU fund inflows and lower output at motor vehicle manufacturers. In the entire year, GDP growth is expected to pick up substantially, thanks to economic fundamentals and government measures. The soaring number of building permits also signals a positive trend,” Varga said.

Altogether, downside risks to projections that Hungary’s GDP will exceed 2% this year have significantly grown with this weak quarterly data. Hungary’s debt ratio also started to rise in the first quarter again, but then it always does at the beginning of the year. Still the bad news made analysts uncertain about the outcome of the Fitch Ratings’ review scheduled for May 20; it is still a question when Hungary may see an upgrade back to investment grade.