Moving slowly into recession
Preliminary GDP for Q3 was much stronger than suggested previously by the MNB’s frequently cited lead indicator. However, the economy is still moving into recession slowly, as shown by the marginally negative quarterly growth rate. Strengths in Q3 included industry and retail sales, whereas real wage growth and new bank loans to households have decelerated substantially. More will be known on December 1, when detailed GDP data is set to come out.
Winter has not started yet, but the weather is already cold enough to cause Hungary to draw down from its considerable gas inventories. European storage levels are close to maximum, but it remains unknown how much EU states will be able to replenish the gas they use daily and continue shipments towards Hungary at the same time. The vulnerability of energy imports is clearly shown by a recent rocket hit at the Friendship pipeline in Ukraine, which has led to a minor, but not insignificant disruption to supplies at local petrol stations in Hungary.
Fiscal adjustment is proceeding with impressive speed, especially in light of the large cost of energy subsidies this year. The central government’s cash deficit ratio fell almost to the annual target in January-October.
Net external financing requirements looked particularly ugly in Q3, due to the super-high prices of energy imports in summer. Cumulative nine-month figures also showed substantial deterioration. Positively, FDI inflows were also quite robust, the overall balance was in surplus, and official FX reserves remained intact at roughly three months of GDP and imports G+S. The current account in September was significantly better than in July and August.
The headline rate of CPI-inflation rose further in October, but at a much slower pace than in the previous month. The September data seems to have captured the full impact of the recent reduction of energy subsidies. Latest producer price developments look mixed: the acceleration of PPI-inflation in industry stopped in September, whereas agricultural prices rose even faster than earlier in the same month. At end-2022, CPI-inflation will probably exceed the forecast of the MNB’s Q3 inflation report, but it is likely to be significantly less than a recent prediction by the economy minister.
Since raising the sterilization rate drastically on October 14, the MNB has made hardly anything else that continuously keeping its daily instruments, the O/N deposit and the HUF to EUR swaps, at work. This may have been the right thing to do, judged by the forint’s stabilization in the EURHUF 400-410 range, the massive fall of government bond yields, and the most recent expansion of the O/N deposit stock, which hints at a substantial net inflow of foreign funds into the local banking sector.
Using time while investors are preoccupied with how to make money out of the sharply higher MNB interest rate, the government, which often interferes with monetary policy, introduced a new rule on existing bank loans to SMEs, banning any repricing within the period between mid-November and the middle of 2023. This affects a large number of small companies and a substantial amounts of loans. In addition to the political gains made by the government, this measure will increase the stability of the SME sector in a difficult high-inflation period, whereas it will definitely reduce the efficiency of monetary transmission through bank lending. A similar impact is expected from another new measure to limit the interest institutional investors and large-scale individual investors can earn on bank deposits.
The government claims that it has implemented all required anti-corruption reforms, in line with its commitment made to the EU Commission, by its November 19 deadline. This has not been confirmed yet by the Commission, which is set to hand in its proposal to the EU Council by end-November, for the latter to decide on the rule-of-law procedure against Hungary by December 19. The media and investors appear to be stunned by rumors that Hungary may not be fully acquitted on the subject, but in fact, this outcome has been very likely for several months now. We expect a moderately positive decision, which would keep Hungary’s anti-corruption activity under close scrutiny, but also open the way towards a conditional approval of its utilization plan for RRF funds before the end of this year.
However, a positive decision on this subject will be made more difficult by Hungary’s objection to common EU borrowing to provide aid to Ukraine. Hungary has recently gotten into a sharp conflict with the crucially important German government. Most recently, a scheduled V4 meeting was called off, as the representatives of the Czech parliament were not prepared to talk to PM Orbán, protesting his friendly attitude towards Russia. Also in the CEE region, PM Orbán’s outfit worn at a recent football match has caused harsh criticism from governments of neighboring countries.
In domestic politics, demonstrations for higher salaries for teachers have continued, whereas the government keeps passing the blame on to the EU, which is holding back the funds allocated to Hungary. PM Orbán is using every opportunity to suggest publicly that Hungary is threatened by unintentionally getting involved in the war, because of the EU’s heavily pro-Ukraine political stance. Stressing this point may serve to divert public attention from domestic matters, and it may provide justification for maintaining the existing state of emergency, under which Mr. Orbán can govern by issuing decrees on a wide range of issues.
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