Falling IP deepens Hungary’s woes

Another dose of bad news for Hungary on Tuesday as industrial production figures for November showed a much sharper contraction than expected. Output fell by 6.9 per cent year on year, much worse than the consensus 3.5 per cent contraction.

It leaves the country facing a deepening recession just as the government has thrown caution to the wind and decided it can do without the support of an IMF loan. The chances of an adequate response seem limited given the changes about to take place at the top of the central bank.

November’s IP figures followed a contraction of 3.8 per cent year on year in October. Daniel Hewitt at Barclays pointed out that part of November’s fall was base-related but that it also reflected very weak domestic and external demand:

This, in conjunction with the drop in PMI in December, implies that the recession continued in Q4 leaving Hungary with weak economic momentum heading into 2013. While we still anticipate that growth will stabilize in 2013 at +0.1% compared with -1.4% in 2012, these indicators highlight downside risks to our forecasts.

As Hewitt notes, weak performance and falling inflation – running at 4.6 per cent a year – suggest there is room for further relaxation in the central bank’s policy rate, currently 5.75 per cent after five cuts in as many months.

Gross external debt as a percentage of GDP, unadjusted. Source: ECB

But there is a problem. The forint has fallen sharply over the past month. Further cuts will only make it weaker, making it harder for Hungary to make payments on its external debt, equal to about 130 per cent of GDP according to the European Central Bank.

But there is another problem: such concerns may not influence monetary policy for very long. Hewitt again:

there is high uncertainty over future monetary policy as a new governor of the NBH will take office on 3 March, a new deputy governor on 27 March, and another new deputy governor on 3 July. These new appointments, together with the previous appointments of external MPC members, will leave the entire MPC appointed by PM Orban and the Fidesz controlled parliament. Economy Minister Matolcsy is considered to be the front runner (Portfolio.hu) and has announced that he favours unorthodox policies at the NBH, so far unspecified. PM Orban is expected to announce his choice for NBH governor only in the second half of February.

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