Hungary - Economic update
Like elsewhere in the region, the export-oriented Hungarian industrial sector had a weaker quarterly volume performance in Q3 (compared to Q2). This was also the case in September as industrial production decreased by 0.6% yoy (though the working day adjusted figure still showed positive growth of 2.2% yoy). The seasonally and working day adjusted figure was down by 2.1% mom in September, but the previous months showed a 3.9% mom growth, so the comparison base was high. All in all, this points to a gradual slowdown of the industrial sector (figure HU1). Moreover, as the global environment might deteriorate further as well, prospects for the near future are not as favourable as they were in recent years. On the other hand, ongoing investments in the sector might counterbalance the negative international environment. So we still expect that industrial production may grow by around 4% yoy in 2019.
Figure HU1 – Gradual slowdown in Hungarian industrial sector (industrial production, calendar adjusted, % change yoy)
Q3 GDP figures confirmed that the Hungarian economy continued to grow very fast this year. According to flash estimates real GDP grew by a very strong 5% yoy and 1.2% qoq respectively in Q3 2018. The above-mentioned industrial production figures already suggested that the sector wasn’t the main driver of economic growth. Although detailed growth composition figures are not yet available, most likely, the industrial sector’s growth contribution was roughly 0.5 p.p. Meanwhile the construction sector remained on track, so it likely boosted the economy by around 0.8 p.p. in Q3. The biggest growth contribution likely came from the service sector.
Inflation reached its target
Hungarian inflation accelerated from 3.6% yoy in September to 3.8% yoy in October. Core inflation also went up from 2.4% yoy in September to 2.6% yoy in October. The main drivers of the increasing inflation are fuel, tobacco (there was an excise duty hike in September), tradable goods and market services. Food price increased more slowly than a year before. Although the National Bank of Hungary (NBH) stated that there are no inflationary pressures coming from the weaker exchange rate and faster wage growth, inflation figures suggest otherwise. Prices of clothes increased compared to last year, which confirms our view that as new collections are coming in and firms have to refill their inventories, a weaker exchange rate of the HUF pushes prices up even more. Services prices are gradually accelerating as well, which might be caused by strong domestic consumption and accelerating wage growth. Based on ongoing wage negotiations, these upwards inflationary pressures will remain in place for next year as well.
We expect that headline inflation will moderate temporary in November, which will likely be followed by an acceleration till March (the peak might be around 4% yoy). We see annual harmonized inflation at 2.8% in 2018 and 3.3% in 2019, which suggests that the NBH has already reached its inflation target (3.0% +/-1 ppt).
NBH to stress the need of monetary policy normalisation soon
Hence, the main question is when and how the NBH may react to current inflation developments. As core inflation is still below 3% yoy, we don’t expect any sudden policy changes but the NBH communication might become slightly more hawkish, highlighting the need for monetary policy normalisation going forward. We still don’t expect a monetary policy change for this year, so the short end of the curve may not move substantially higher till year-end. However, by the end of next year, a first policy rate hike by the NBH becomes more likely.