GDP recovery in Q2 was driven by net exports, positively for the HUF and inflation

HUNGARY - In Brief 06 Sep 2016 by Istvan Racz

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This morning, the KSH published its detailed GDP numbers for Q2. According to those, the sharp recovery of GDP (+1% qoq, +1.5% yoy, sda) that followed a rather negative outcome (-0.8% qoq, +0.7% yoy) in Q1 was driven predominantly by a surge of net exports, rather than by domestic adsorption. In Q2, exports grew by 3.4% qoq, 8%yoy in real terms, against import growth of 2% qoq, 6% yoy. In Q1, export growth was lower, and imports grew faster than exports. Meanwhile, domestic adsorption was down by 0.7% qoq and only slightly up, by 0.3% on yoy basis, as opposed to -0.3% qoq, +2.5% yoy in the first quarter. Even though household consumption growth continued to be genuinely robust (4.6% yoy in Q2 after 4.5% yoy in Q1), overall final domestic demand remained weak, because of a 17.8% yoy collapse of fixed investment.The significance of this structure of GDP for inflation and the HUF exchange rate is substantial. Despite the evident robustness of consumer demand, the overall weakness of domestic demand does not really support any early pickup of inflation, particularly as Hungary continues to enjoy terms of trade gains in 2016 (2.4% on merchandise trade in H1). Besides, the improvement of net exports seems to be further reinforcing the BOP, allowing the MNB to go for a relatively strong forint exchange rate, while pressing for even lower domestic interest rates. This is only for short term, of course, as the fundamental situation may change as soon as fixed investment demand is picking up again and/or energy and commodity prices recover, assuming the continuation of the existing robust wage growth. On our current expectation, domestic inflationary pressures may increase mater...