Industry has passed its cyclical peak, following the Euro Area

HUNGARY - In Brief 08 May 2018 by Istvan Racz

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New industrial data shows that output growth in the sector, one of the key factors behind last year's 4.2% real GDP growth has passed its cyclical peak already. This morning, KSH reported -0.7% mom, 2% yoy for output growth in March, down from 4.1% yoy in February and 6.6% yoy in January (all on sda basis). This implies 4.2% yoy growth in Q1, also down from 6.6% yoy in the same period of last year. In addition, the April manufacturing PMI came out at 53.3, down from 57 in the previous month and from a 61.1 local peak recorded in January. All this is not at all independent from the recent developments in the Euro Area, on which Hungary's industrial sector depends crucially, due to a great deal of vertical integration. In terms of output, Eurozone industry has been shrinking for the last three months in a row (meaning the December-February period), and industrial leading indicators (PMI, IFO) are also deteriorating, although from a rather high level, just as domestically.All this does not necessarily mean that the Q1 GDP growth data (due in first estimate on May 15) should be bad, falling sharply from the outstanding 4.9% yoy growth measured in Q4 2017. This is because retail sales, supported by a double-digit rate of wage growth, jumped by 7.2% yoy in Q1 (day-adjusted), significantly up from the 4.9% yoy reported for Q1 2017. Although it is unclear for the moment how much of the extra consumer demand fed imports and how much was met by domestic output, high retail sales growth must have been beneficial for some service areas, notably trade and transportation. A more significant slowdown on the economy should come later in 2018, when wage growth is already decelerating (...