More Complication for Fidesz
Detailed GDP data for Q4 confirms the preliminary 2.9% growth for the whole of 2015. Excluding agriculture, growth even accelerated slightly from 2014. On the supply side, growth was driven by manufacturing, mainly the car industry, and some service sectors. On the demand side, it was propelled by robust consumption growth and a widening export surplus.
Contrary to the impressive Q4 data, growth-related monthly statistics reflected an ugly picture in January. Retail sales and industrial output growth decelerated sharply, whereas construction output fell drastically. Industry followed a negative European trend, and consumer demand presumably slowed on weakening real wage growth. Bank credit to the economy continued to fall, which was especially negative given the sharply reduced availability of EU transfers, the factor that caused the collapse of construction output.
The central government reported a small cash surplus for the first two months of 2016, representing a substantial tightening of the fiscal stance, in comparison with the big deficits usual at this time of the year. Available details, for January for the time being, suggest that about two-thirds of the yoy improvement came from lower expenditure, even though official comments are stressing the importance of higher-than-expected tax revenue. Such a tight fiscal trend will not be sustainable without a breakdown of GDP growth, and neither is it required for meeting the 2016 fiscal deficit target.
The headline CPI was depressed again by decreasing fuel prices, falling to a slightly positive level in February. Various core inflation indicators also dipped marginally, but remain essentially unchanged in the 1-2% range.
There is rarely a clearer case for further monetary loosening than now, given the combination of decelerating supply and demand, fiscal tightening and shrinking bank credit. A key threat is HUF strengthening, as the external income surplus has increased further recently, and is putting upwardly pressure on the exchange rate. On March 22, we expect the Monetary Council to reduce its inflation forecast, and to turn again to its non-conventional toolkit, possibly touching the interest rate corridor, IRS policy or the BUBOR market.
Despite zero-interest refinancing loans, lowly priced IRS contracts and the FX swaps extended to banks when foreign currency loans to households were converted into forints, the MNB’s operating deficit has fallen in recent years, due to the lower base rate and the decreasing size of monetary sterilization. This should increase the Bank’s degree of freedom to shape future policy.
Fidesz is in no major trouble yet, but domestic politics has definitely become more complicated recently than it appeared in recent months. In February, Fidesz was defeated at an important local government election, and it ran into a scandal about an opposition referendum call against the mandatory closure of supermarkets on Sundays. In addition, no progress has been reached in calming down revolting teachers, who are planning another major street demonstration in mid-March. Meanwhile, Hungary remains on collision course with Germany because of its fierce opposition to mandatory migrant quotas, on which the government has initiated a controversial referendum recently.
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