Time to Vote Again on October 2
The sharp recovery of GDP in Q2 stemmed mainly from a pick-up of net exports, due to a bounce-back in manufacturing and to decelerating import growth as fixed investment fell. On the whole, domestic adsorption decreased on qoq basis. Consumption growth continued to be robust, but it showed no particular acceleration in Q2.
Despite an upturn of the manufacturing PMI, industrial output fell for the third consecutive month in July, also keeping yoy output growth in the negative range. Meanwhile, retail sales growth remained significantly positive, yet it slowed down materially compared to previous months. The latter took place despite a continued robust expansion of the influx of foreign tourists.
Q2 income data reflects growing pressure on enterprise profits by rapidly rising wages, paid out in response to an acute labor shortage. This is also an important negative for the financing of enterprise balance sheets, as bank credit is turning around only very slowly, and EU development transfers are just starting to recover from the severe setback seen in H1.
Headline CPI-inflation data was a moderate downside surprise in August, as gasoline prices continued to fall in the month. However, core inflation remained unchanged, between 1.2-1.8% yoy. We still expect the headline rate to converge to core inflation by end-2016, but only to the lower end of the latter’s current range. Continued robust net exports and the big external income surplus keep the HUF strong and help tame inflation in short term.
Recent data shows that the actual fiscal stance is still markedly tighter than budgeted for this year. Below-plan deficits by all measures are typically attributed to high revenue, but in fact, they are explained in a great part by thrifty spending policy. However, an unusually big surplus was reported in August, in which extra revenues may have played an important role.
Despite the reduced frequency of 3-month deposit tenders, the size of monetary sterilization did not fall further in August. But as decreasing FX reserves data shows, capital outflows continued at a moderate pace, probably due to uncertainty ahead of the late-September announcement on the limits for 3-month deposit placements. We expect the MNB to set the starting limits lower than the existing level of deposits, and to cut access further later on, to correct for the recent excessive strength of the forint.
By the time this report has been published, readers will likely know the result of S&P’s revision of its BB+/Stable rating on Hungary’s LT/FX government debt. On this occasion, we see no chance for an upgrade at all, yet some probability of the outlook to be moved to positive seems to exist.
Two weeks ahead of the referendum on migration policy, the key question is still the participation rate. Chances for the vote to prove valid or not seem roughly equal, but about 90% of the vote is likely to be cast in the government’s favor. Given this and that the anti-government campaign of the center-left opposition has proven extremely weak, the risks do not seem very high for Fidesz. Should the likely voting result be realized, the government will likely be able to claim victory even if the validity threshold is narrowly missed.
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