Hungary - Economic update June 2019
No signs of slowdown
After an impressive first quarter when Hungarian economic growth witnessed the fastest growth rate in EU (5.3% yoy), the dynamics remain at the beginning of the second quarter. The working day adjusted industrial production increased by 6% yoy in April, which is clearly a surprise as the European economy is slowing down, which could have pulled backed the Hungarian industry as well (figure HU). So far, it appears that new industrial capacity – resulting from investments last year – are able to counterbalance the less favourable international market environment. However, looking ahead there is worrying news as some factories – especially related to vehicle production – plan to decrease their production in the coming months. So in the event the EU economy remains subdued, the negative trend may spill over to the Hungarian economy as well. Therefore we expect some moderation in industrial performance in the coming months.
Figure HU – Activity data showing few signs of a slowdown so far (volumes, % change year-on-year)
The retail sales sector had an excellent month in April, up by 8.5% yoy, partly fuelled by an Easter effect, but the underlying trend is also very strong (figure HU). As the unemployment rate is low and the wages are accelerating, domestic consumption is expected to remain elevated in coming months. Hence private consumption remains the main driver of the economic growth this year.
Inflation still close to 4%
According to the national indicator, consumer price inflation remained at 3.9% yoy in May, in line with the market consensus. More important is that all the underlying inflation figures measured by the National Bank of Hungary (NBH) (like core inflation filtered from indirect tax changes or demand driven inflation) increased, with a few measures reaching the upper band of NBH’s inflation tolerance range of 4% yoy. Although fuel and tobacco price increases are still one of the main drivers of CPI, the price of market services are rising continuously too, which definitely confirms our view that there is a domestic driven inflation pressure in Hungary.
Another NBH’s hike to come in June
The National Bank of Hungary (NBH) left its monetary policy unchanged in line with expectations. So the benchmark rate remained 0.9%, the overnight deposit rate -5bps, while the overnight lending rate stayed at 90bps. The Council’s statement stance was as dovish as in April, highlighting that internal and external factors are working against each other. This means that although the Hungarian economy had a robust growth in Q1 2019 and the consumer price index also accelerated to 3.9%, the external environment may cool down the Hungarian economy during the year.
The NBH expects that core inflation filtered from indirect tax changes may increase during the autumn, but it may reverse at the end of year. They also highlighted that the oil price was the main driver of CPI rise in the last months. The Monetary Council emphasized that the world’s leading central banks have cautious monetary policy and the ECB may maintain loose monetary conditions longer than was expected before. The statement didn’t reflect on the substantial HUF weakening, but it highlighted that sentiment on global markets was volatile, influenced by trade policy risks and macroeconomic data. The Council also mentioned again that the new corporate bond purchasing program will be started from 1st of July, with a starting amount of HUF 300 bn and the NBH will neutralize excess liquidity coming from the program by the preferential deposit.
It is quite clear that the NBH doesn’t plan any fast and substantial monetary policy adjustments. Hungarian monetary policy is likely to depend on the ECB’s monetary policy path, although both Hungarian economic growth and Hungarian inflation developments call for some monetary tightening. Moreover, the government plans to introduce new economic policy stimulus in order to maintain Hungary’s GDP growth above an annual rate of 4%. All these factors suggest that the risk of overheating the economy is increasing, which is partly reflected in the fast deterioration of the current account balance. The latter may turn into negative territory this year. Taking in account the cautiousness of the NBH, we maintain our view that the Council may take the same actions in June as in March: increasing the overnight deposit rate by 10bps to 5bps, and decreasing the average crowded-out liquidity by HUF 100bn to HUF 200-400 bn for the third quarter.