Hungary’s GDP: stuck in reverse

Photo: Bloomberg

Oh dear. In spite of all the rousing speeches and upbeat forecasts, the ribbon-cutting ceremonies and strategic agreements between the government and whichever company is prepared to swallow pride and sign up – yes, even in spite of the very real boost to growth from the expanding automotive sector – the harsh results of prime minister Viktor Orban’s revolution at the ballot box in 2010 and subsequent 33 months of unorthodox economic policies are becoming all too apparent.

Hungary’s economy shrank by 2.7 per cent in the last quarter of 2012, a result that sinks the country yet deeper into recession and drags the full-year decline to 1.7 per cent.

“Both market consensus and our in-house forecast expected a [quarterly] 2.1 per cent drop, thus the figure was a negative surprise for the market,” is how OTP Bank gingerly described things in a flash report.

The data were “far worse than expected” said Zoltan Torok of Raiffeisen Bank, while at Nomura, economist Peter Attard Montalto put it more bluntly: “Our own forecast of -1.5 per cent was blown out of the water.”

The forint, which had opened the day at around Ft290 to the euro, quickly shed almost 1 per cent as the markets digested the news, reversing the gain made since Hungary’s successful $3.25bn bond issuance on Monday.

On the bright side, inflation for January slipped to 3.7 per cent year on year, giving serious hope that the annual result may come in at around 3 per cent – meaning, as Torok noted, that the target could be met “for the first time since inflation targeting was introduced in 2001”.

However, if so, it will largely be down to base effects (such as a VAT price increase to 27 per cent in January 2012) along with government mandated price reductions this year on household energy, water and sewage fees. These reductions, the companies affected insist, are at odds with real economic conditions.

Regardless, it is the GDP figures which are most worrying. True, the region as a whole has been suffering from the weak demand from western Europe, particularly Germany, but Hungary has performed particularly badly.

This from Raiffeisen’s Torok:

While the economy has been performing poorly in the previous quarters of the year (in the Q1-Q3 period it was -1.3% yoy), a sharp deterioration of economic activity kicked in for the last three months. Agriculture suffered from the heavy drought throughout the whole year (-16.8% in Q1-Q3); construction industry has been contracting for seven (!!!) years now. Service sector value added is dragged due to the government’s extra taxes (on telecom, energy, retail and banking sector) and the necessary fiscal restrictions. While the industry was able to come along with a stagnating performance in Q1-Q3, for Q4 we have witnessed a dramatic fall – mainly driven by a negative turn of export demand.

There is of course an up side to getting the bad news now, rather than just before elections due in the spring of next year – the low base of 2012 will help make this year’s figures look rosier. Furthermore, OTP believes the fourth quarter figures “paint an [especially] gloomy picture” because industrial production in December was exceptionally depressed, and the expected rebound will show up in this year’s first quarter. Torok again:

… it is also true that the very low 2012 base would allow a more tangible improvement for 2013 [assuming] 1) agriculture would come along with a positive surprise; 2) real income increase of households would materialize in consumption demand increase; 3) net export benefits more than expected from new car industry capacities coupled with a positive turnaround of demand in the course for the year.

Yet despite these potential upsides, he maintains his view that Hungary’s economy will contract by an additional 0.5 per cent this year – and warns of more bumpy riding in the immediate future.

He says investors have priced in the positives from this week’s bond issue; concerns over the appointment of a new central bank governor next month and over fiscal issues will now move to the fore. The European Commission is due to publish its interim forecast on Hungary on 22 February. “We see chances for the budget deficit forecast above 3 per cent for 2013-2014, which would not be a positive message for Hungary’s intentions to get out of the Excessive Deficit Procedure as soon as possible,” Torok says.

The prime minister will certainly take solace from the spectacle of Hungary’s opposition parties fighting among themselves. But if Orban and his party, Fidesz, are to be re-elected next spring, those auto production lines had better get on overtime working, and fast.

Related reading:
Hungarian bonds: betting on Orbán, beyondbrics
Hungary gears up for bond issue, beyondbrics
Matolcsy scares markets (again), beyondbrics