Only Modest Growth Expected In 2013
BMI View: While we hold to our forecast of -1.2% this growth, we have revised down 2013 growth to 1.2% from 1.5% previously. The continued deterioration in economic activity in the eurozone, and the failure of the government to thus far reach an external financing arrangement with the IMF/EU continue to weigh on all areas of the economy. As it stands, net exports will provide some degree of support to headline growth this year given how weak import demand has been, however, risks to our growth medium-term growth forecasts lie firmly to the downside.
The most recent data released by the Hungarian Central Statistics Office (KSH) shows that the Hungarian economy officially entered recessionary territory in the second quarter of 2012, with economic activity sliding for the second consecutive quarter. In quarter-on-quarter (q-o-q) terms, the Hungarian economy contracted by 0.2% in Q212, amounting to a 1.3% decline in year-on-year (y-o-y) terms. This follows a 1.0% q-o-q decline in the first quarter of the year (equivalent to -0.7% y-o-y).
The most recent GDP reading is supportive of our long-held view that Hungary would return to recessionary territory this year, and as we said back in January of this year, this dynamic would result from a 'deterioration in economic activity in the eurozone, as well as heightened domestic pressures brought on by investor uncertainty over government policy' ( see our online service, January 16, 'Recession Looms'). This view has been borne out in recent quarters, with all components of GDP by expenditure displaying pronounced weakness.
On the political front, matters have become more muddled in recent weeks during negotiations between the IMF and Hungarian government over a new external financing arrangement. Hungarian Prime Minister Viktor Orban rejected IMF economic conditions on September 6, and stated that the government would begin working on alternative proposals. However, a spokesperson for the IMF has since stated that dialogue between the two sides is continuing, although a date has yet to be set for the IMF's next mission to the Central European nation.
For now, given that the major credit rating agencies still consider Hungarian sovereign debt junk status, persistent investor fears over erratic government policy, and the deteriorating domestic economy, we remain of the view that some form of external financial backstop will be required by Hungary at some point over the next few quarters. However, while global risk sentiment remains robust it is possible that the Hungarian government will seek to drag out negotiations, thus limiting the likelihood of our view for a deal to be reached in Q412.
While the market reaction to the news has been muted, we expect the government to broadly stick to its fiscal austerity strategy this year, give latent investor fears over the government's fiscal and debt policies. As a result, we are holding to our forecast for real GDP to contract by 1.2%, as the government's target of 0.1% growth looks overly ambitious. However, we have slightly lowered our 2013 growth outlook to 1.2% from 1.5% previously, still below the government's forecast of 1.6% growth underpinned by their expectation for a resurgent consumer.
|All Areas Of Economy Struggling|
|Hungary - Breakdown of GDP by Expenditure, % chg y-o-y|
Private Consumption: Household consumption declined by 1.6% y-o-y in the second quarter of the year, a pick-up in the p ace of decline relative to the 0.7% contraction registered in the first quarter. We envisage another full-year of contraction for household consumption in 20 12 to the tune of 2.3% (the fifth year of real decline in the past six years). This comes on the back of deteriorating economic confidence (owing to both domestic and external weaknesses), a private sector still burdened by high debt, tight fiscal policy and weak domestic credit extension .
|Back In Recessionary Territory|
|Hungary - Real GDP Data|
On the whole, recent leading indicator data supports this view. The Hungarian consumer confidence indicator, compiled by GKI Economic Research Co., came in at -52.7, down from -40.7 in the same month of the previous year. At the same time, retail sales growth has been negative for the past three months ( see chart ). Moreover, having been in negative territory all year thus far, credit growth fell sharply to -11.1% y-o-y in July, the largest fall recorded since the start of 2010. We do not envisage a major improvement anytime soon given the lack of demand for new credit from the wider economy, and the extent of bad loans building up on banks' books.
|No Respite For The Consumer|
|Hungary - Retail Sales, % chg y-o-y|
Government Expenditure: Despite prolonged delays in negotiations between the IMF and the Hungarian government, we do not anticipate the government departing from its tight fiscal policy strategy. Indeed, state secretary of the economy ministry, Gyula Pleschinger, recently stated that any future growth downgrade by the government would not imperil the administration's target of a fiscal deficit equivalent to 2.5% of GDP this year. We also believe that the potential loss of EU cohesion funds in 2013, should the deficit prove larger than EU targets, will act as a policy anchor for the Hungarian government. We currently forecast government expenditure contracting by 2.2% this year, before returning to modest growth next year of 0.5%.
|Hungary - Industrial Production, % chg y-o-y|
Fixed Investment Outlook: We continue to forecast a fourth consecutive year of decline for gross fixed capital f ormation (GFCF) to the tune of 5.0%, followed by positive but negligible growth of 0.5% in 2013. Weakening industrial confidence, both at home and abroad, deteriorating credit channels, poor external demand and tight domestic policy will all act to hold back firm s ' capacity and appetite for large scale investment projects over the next few quarters. As was the case last quarter, leading indicator data continue to bear out this view, with industrial production growth still in negative growth territory, and latest industrial survey readings falling to their lowest levels since late 2009.
Net Exports Outlook: Exports have been hit hard by the slowdown in Hungary's major trading partners in Western Europe, as well as the broader slowdown in the global economy. Export growth came in at just 2.1% y-o-y in the second quarter of 2012, down from 8.6% in the same quarter of 2011. However, owing to the headwinds facing the Hungarian consumer, import growth has show n a more pronounced slowdown, falling into negative territory in the second quarter. Although modest, we still expect net exports to remain positive this year, and provide a 0.6 percentage points (pp) contribution to headline growth. This will rise to 0.8pp in 2013 as global trade flows are expected to begin improving.
Risks To Outlook
Risks to our growth outlook for the Hungarian economy remain firmly to the downside. The failure to thus far reach a deal with the IMF on a financial backstop leaves the Hungarian economy susceptible to a sudden loss in investor confidence. Any major global financial shock could leave Hungarian assets reeling, forcing the central bank to tighten policy aggressively. In turn, this would lead us to revise down our medium-term growth forecasts for the country. Moreover, given Hungary ' s dependence on trade and investment linkages with Western Europe, a worse than expected downturn in the eurozone economy would have a major knock-on effect on Hungarian economic activity and broader confidence.