Hungary - Economic update
Economy still supported by private consumption
The Hungarian economy has continued to be driven by strong private consumption, which was recently confirmed by both GDP details for the third quarter and October’s retail sales (figure HU). The Hungarian Statistical Office released the final estimate of GDP for the third quarter, which showed that the GDP grew by 4.9% yoy in Q3 2018. The detailed figures confirmed our expectation that the domestic components are driving the growth. The biggest contribution to growth came from capital formation (4%pt), but households consumption boosted the economy also substantially (2.7%pt). Net exports pulled back the economy by 1.7%pt. On the supply side the service sector was the strongest engine of the economy adding 2.2%pt to growth followed by the construction (1.1%pt) and industry (0.6%pt).
The main question is how long can domestic demand counterbalance the deteriorating international environment and how long will the NBH and the government maintain thier supportive economic policy. In this respect retail sales for October suggest that that households maintain their robust consumption in Q4 2018 as well, so strong domestic demand may maintain above 4% yoy growth in Q4 2018 as well and so GDP may grow around 4.5% yoy in 2018 as a whole. Recall that retail sales were up by 6.6% yoy in October.
Generally, we see an increase in borrowing activity in both the household and corporate sector, wages are increasing by double digits, property prices are also increasing more than 10% yoy and inflation is above the inflation target although core inflation is still just below 3% yoy. We expect that the Hungarian economy may slow down in 2019, because of slightly weaker domestic components compared to this year. EU funds money use might by roughly the same as this year and the international environment might be also less supportive, so we forecast 3.5% yoy growth for 2019.
Headline inflation down on fuel prices
Headline inflation measured by the national indicator moderated from 3.8% yoy in October to 3.1% yoy in November. Although some decline in inflation was expected, the magnitude of the fall was a surprise. The main reason behind the drop was the fuel price decrease of 4.6% mom and a base effect as there was a substantial increase of fuel price in the comparison period last year. Food prices rose by 0.3% mom, while clothes prices were up by 1.1% mom which confirmed our view that the weaker HUF gradually spills over to consumer prices. However, core inflation remained at 2.6% yoy in November and also other inflation figures measuring underlying inflationary pressures were still increasing. Hence, although headline inflation dropped, we still project underlying inflation to rise gradually.
December NBH meeting will be crucial
The National Bank of Hungary (NBH) meeting in December will be very important as they will publish their new inflationary report. At the last meeting, they said that inflation will reach their target on a sustainable manner in mid-2019, but core inflation has started to increase and the headline inflation was higher than forecasted, but it is also true that the latter was driven partly by the previous fast jump in oil prices. We think that the GDP figure may confirm the Council’s view that the economy is running at full capacity. However, most likely they will maintain their stance that monetary policy highly depends on the ECB’s policy path and on the international sentiment as well.
More specifically, we expect some change in tone of the NBH’s
statement, opening the door towards monetary tightening. The base
rate, the overnight (O/N) lending and deposit rate will likely be left
unchanged, while the 3-month deposit rate and MIRS program will be
abolished at the end of the year. Moreover, the new funding for
lending program for SMEs will be started. The new element might be
that the Council may emphasize that the stock of the foreign currency
swap might be started to moderate gradually. This is supported by the
fact that in previous months Hungary started to receive EU funds
money. If this continues, there is less need for NBH’s monetary
support. It is also important that this is the last time when the NBH
reference rate belongs to 3-month deposit and the required reserves
will be the new reference element from January on. We don’t expect an
increase of O/N deposit rate, that is currently at -0.15%, in Q1 2019.
In our view the first official rate hike may come only in Q4 2019 as
the NBH may try to maintain the current low interest environment as
long as possible.