Stronger industry, weaker retail sales in Q1

HUNGARY - In Brief 06 May 2017 by Istvan Racz

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Following a year of 'positive stagnation' (+0.6%) in 2016, industrial output rose by 9.5% yoy in March and by 6.2% yoy in Q1 2017. This appears to be caused by the strengthening European economy, as Hungarian industrial output is moving (at last) in line with Euro Area manufacturing PMI:Sources: KSH, Markit EconomicsThis looks like a much stronger showing of industrial output than the expectation of most analysts (including ours) and points to the direction of annual GDP growth in 2017 that is close to 1% higher than our current 3.3% forecast (the official forecast is 4.1%). But one needs to be careful, given the simultaneous slowdown of retail sales growth to 2.7% yoy, calendar adjusted, in Q1, from 4.8% annual growth in 2016 (even though March saw some recovery to 3.4% yoy):Source: KSHAs evident from the chart above, this slowdown took place in the face of very strong real net (after-tax) wage growth, and it is currently unclear if- the household savings ratio increased, possibly together with a growing current account surplus;- household income other than wages fell recently, causing the deceleration of consumer expenditure; or- consumer expenditure on services (not reflected by retail sales) grew faster than retail sales, explaining the divergence of the wages and retail sales lines on the chart.The foregoing scenarios, or their possible mixtures, would have very different impact on GDP growth, of course. And please, bear in mind that industry represents only 23% of total GDP valued at 2005 prices, on the basis of which the 'sdab' series for GDP growth is calculated. Anyway, the preliminary Q1 GDP data, expected on May 16, will be interesting again.