Weak Q2 GDP data was nothing extraordinary
Preliminary GDP data shows that the recession continued in Q2, and the year-on-year setback increased from previous quarters. Analysts typically found this result surprisingly negative. We do not share this general assessment, as the poor performance of Q2 GDP was properly predicted by output, wages, and retail sales statistics, the consequences of fiscal adjustment and tight income and monetary policies. But the clarity of the picture may have been reduced by KSH’s agricultural data, which raised GDP above its underlying trend in Q1 and probably pushed it below trend in Q2.
Importantly for longer-term inflation prospects, the current weak economy has not done much to alleviate the tightness of the labor market, or at least evidence is mixed in that regard. Employment is actually rising slightly, as employers are not laying off large numbers of staff in response to moderately shrinking activities, and there are new hires as well, especially in the dynamic part of the industrial sector. The unemployment rate has risen somewhat lately, probably as lowly skilled domestic labor is squeezed out by increasing imports of foreign workers.
However, short-term inflation prospects remain pretty encouraging. Producer and import prices are still following a nosedive trend because of more friendly commodity prices, weak demand and good weather conditions. In August, the forint’s moderate correction and more expensive Urals crude pushed fuel prices higher, but the impact is far too small to break the rapid downward movement of year-on-year CPI-inflation. The latter is likely to end this year somewhat higher than predicted by early summer forecasts, but still safely in the single-digit range.
The BOP picture is becoming increasingly positive. There was a big improvement in the current account in H1, with all of the energy, merchandise non-energy and services balances significantly changing for the better. The improvement of the basic balance was much smaller, as investment income, net transfers from the EU and FDI flows deteriorated on a yoy basis. But the really good news is that Q2 figures were much better than the Q1 outcome in almost all respects.
Budget figures for H1 have caused mixed feelings. There is ample evidence that a major fiscal adjustment is indeed underway. But the remaining distance to meeting the annual deficit target still looks massive. Insisting on the target would imply keeping the budget largely balanced in H2, limiting the potential for the economic bounce-back that government ministers keep talking about. Alternatively, giving up the fiscal target would make rating agencies unhappy, the same way as the apparent lack of improvement on the rule-of-law issues in the context of EU funds.
The foregoing combination of factors allowed the MNB to extend its rate-cutting trend in August. It was especially positive that the EURHUF correction to weaker forint levels, seen in July, stopped in early August, moderating the otherwise unavoidable forint weakening, as desirable. The further course of monetary policy will be reassessed at the late-September Monetary Council meeting, with the possible result that the pace of interest rate cuts may decelerate in Q4 to avoid an unduly rapid weakening of the forint and the reignition of inflation pressures.
There has been one important change in foreign policy lately, a spectacular improvement of diplomatic relations with Ukraine. Hungary is playing a role in forwarding Ukrainian grain towards western seaports. President Zelensky visited the Transcarpathian region, including the local Hungarian community there. A partially Hungarian-origin Ukrainian ambassador has been accredited to Budapest, and most recently, Hungary’s President Katalin Novák paid an official visit to Kyiv. Current speculation is that PM Orbán may be responding to the ongoing shift of the European political mood in favor of Ukraine, including in Hungary’s close neighborhood.
The short-term energy situation remains favorable, despite a recent upward correction of crude oil prices. Gas reserves are at high levels, and gas prices remain low despite occasional spikes due to various factors. Electricity consumption continues to fall, not least due to the increasing availability of solar panels in households. Ukraine’s recent decision to end the transit of Russian gas has no direct effect on Hungary. However, there has been little progress in reducing the longer-term dependence on Russian gas supplies lately.
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