GDP Growth Sharply Higher in Q2
GDP recovered from its Q1 debacle and showed surprisingly robust growth in Q2. The main contributors were services, probably on consumer demand, and agriculture, due to a positive supply shock. Construction also started to recover on q-o-q basis. But even so, growth was quite weak on the whole in H1, falling substantially short of the official forecast given for this year.
The weakness of industrial output continued and even intensified in May and June, following an uptick in April. The key problem was once again a loss of momentum in the car industry. The VW-Audi emission fraud incident seems to have more far-reaching consequences than expected by most, prospectively depressing Audi’s activities throughout the whole of 2017.
Outside industry, output and demand look mixed, but evidence is shifting towards a stronger economy. Positive signs include exports, wages, retail sales and even bank credit. But construction is still weak in y-o-y terms, and the robust momentum of tourism, seen in early 2016, was fading in April-May.
Paradoxically, the longer-term prospects for the car industry look excellent, due to Mercedes’ new plans to build a new three-unit production complex by 2018, and to Audi’s intention to start the production of its new Q3 model in Hungary in the same year. Based on this, Hungary’s car production is likely to make a big jump in 2018, but only after a temporary setback in 2017.
July CPI-inflation data was in line with analysts’ mainstream outlook. The headline y-o-y rate fell slightly, whereas core inflation rose a bit. July was probably the last month with negative inflation. In the coming months, the headline rate is likely to jump to 0.5-1% yoy on a base effect related to petrol prices, and then to rise to 1.4% yoy by end-2016, on increasing non-fuel inflation.
The central government’s cash balance turned negative again from June, but the cumulative deficit remained moderate and was markedly down from 2015. Fiscal dependence on the EU fell considerably, and the government debt ratio remains on a decreasing trend. However, there are signs of loosening from the middle of 2016, primarily through more development spending.
We are presenting a chart on the adequacy of official FX reserves, in view of the MNB’s frequent mention of the Guidotti-Greenspan rule. We believe that current reserves adequacy is largely sufficient, but given its decreasing trend, the MNB should carefully watch its steps in further de-sterilization, making sure that investors are satisfied about this aspect at all times.
In July, the MNB left its interest rates unchanged, but it restricted access to its 3-month deposit, to reinforce de-sterilization, from August. In response, money market rates and T-bill yields have fallen markedly as of mid-August. We expect further MNB efforts to achieve yield compression and a weaker forint, the latter because of competitiveness problems, from late September.
The key story in domestic politics is the campaign for the upcoming referendum on refugee policies, due in early October. Current odds support Fidesz, but the risk of insufficient participation remains significant. The stakes are high, as the result could influence Fidesz’ reelection chances in 2018.
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