Growth was surprisingly driven by net exports in Q3
In Q3 2019, GDP growth was driven by improving net exports, a surprising fact in the light of the weak European economy. Another surprise is that the key sector behind this strength was car manufacturing, despite the problems facing German car makers, the dominant force in Hungary’s vehicles industry. This further substantiates our long-held belief that a strategic relocation of industrial production into Central and Eastern Europe is currently taking place.
Other factors behind the strength of GDP growth were the continued rapid expansion of construction output and the renewed acceleration of real wage growth. In construction, a mild decelerating trend of growth has been observable since 2017, but that started from a very high rate. Despite rapid wage growth, profits also rose markedly, due to high nominal GDP growth and the government’s decreasing share of it, as regards the primary distribution of income.
Available data for October, including on industry, construction, net exports and retail sales, does not show any break in the strong domestic growth trend.
Over the past three years, the increase in labor productivity exhibited steady improvement and reached a rather high rate by Q3 2019. This explains a lot of the recent slowdown of the deterioration of the domestic labor market. Accelerating productivity growth may be partly due to under-reporting of guest workers, but in part it must have been caused by massive investment in automation, especially in the industrial sector.
The BOP situation has been reinforced by Q3’s strong net exports performance. On a cumulative yoy basis, the net financing balance is still deteriorating so far this year, but now that worsening appears to be hardly more than negligible.
In November, a widely predicted upward correction by the headline rate of CPI-inflation started. This was caused by a big fuel-price-related base effect and is expected to continue in the next two months as well. We expect the headline rate peak exactly at the MNB’s 4% tolerance ceiling in January, followed by a slow decrease afterwards.
However, the MNB predictably did not react to the rise of the headline rate at the December rate-setting meeting, as adjusted core inflation remained exactly at the level of Bank’s September forecast. In fact, the Bank loosened its policies slightly further by raising the size of its bond purchasing program. It is increasingly clear that the MNB’s real inflation target is its tolerance ceiling. The risk it is running is increasing inflationary expectations if the headline rate happens to reach or exceed that target.
Over the past month, the forint traded in the broad range of EURHUF 329-337, hitting a historic record low on one occasion in late November. The MNB did not react to this either, strongly suggesting that it is perfectly happy with the forint’s gradual and moderate depreciation vis-à-vis the euro. Moreover, it continued to intervene against the forint through FX swaps, by which it also pushed BUBOR rates further down marginally.
Judged by the quarterly net financing data, the government deficit ratio came out well below the annual target in January-September. In the rest of the year, the fiscal balance will likely be negatively affected by a large penalty imposed by the EU, and by the usual extra spending from the savings accumulated in the first three quarters. In the end, the Finance Ministry is likely to position the annual deficit slightly below the target level.
Regarding foreign policy, EU budget talks are approaching their final lap. The Finnish Presidency’s compromise proposal included conditions even worse for Hungary than those the EU Commission’s starting proposal did previously. A recent U-turn by Hungary through joining the EU’s carbon emission consensus suggests that PM Orbán intends to improve positions for further talks, with a view to mitigating Hungary’s likely losses of EU transfers.
On other issues, PM Orbán’s second candidate for the European Commission was approved without major problems, but the European Parliament is set to discuss again the state of democracy in Hungary at some point in January. Fidesz survived the European People’s Party’s November congress, but the election of Donald Tusk as EPP’s president is not necessarily good news for them. The EPP has decided to deliberate on Fidesz’ membership before end-January.
In domestic politics, the declared ceasefire between the government and the opposition-led local governments fell apart before actually getting started. Fidesz decided to amend a series of regulations to make local governments’ life more difficult. The opposition claims that these moves amount to a further reduction of democracy and threatens to block some of Fidesz’ favorite prestige investments, proposing improvements in public services instead.
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