Hungary’s gross domestic product grew by 1.6% year on year and by 0.3% quarter on quarter in July-September 2016, the Central Statistical Office (KSH) reported on Tuesday. According to the second estimate figures, yr/yr GDP growth was 0.2 percentage point higher than the preliminary reading and the q/q data is 0.1ppt higher.
Looking at the yr/yr index we can state that the pickup of economic growth did not continue. Quite the contrary, there is a deceleration trend in play since the second half of 2014. The growth rate of the Hungarian economy matches that of the Eurozone, which means the country has not grown faster than the region it wants to catch up with.
The 0.3% q/q print is not exactly robust, either. Depending on the which index (raw, wda, swda) you examine, the economy grew by 1.5% to 2.1% in the first three quarters. The government should now certainly forget about its mantra of “growth around 3%" this year. GDP growth, according to data adjusted seasonally and for calendar impacts, which is the most relevant as far as economics go, could remain below 2.0% this year, but even the raw figure (driven higher by the leap day effect) is unlikely to reach 2.5%.
Today’s detailed release sheds light on the structure of growth too. The preliminary expectation was that while manufacturing sectors were wobbly, the services sector, driven by domestic demand, was the engine of growth. This expectation proved only partly correct, though. Surprisingly, the services sector’s growth slowed down compared to Q2, whereas industry, which has been performing really poorly, fared better than we anticipated. (At least the monthly production data were suggesting to us an even worse performance.) The picture on the consumption side is similar. The rate of household consumption growth surprisingly faded, whereas gross fixed capital formation turned out better than projected, as a result of inventories.
We need to highlight the important role agriculture played in Q3 GDP growth. The weather-dependent sector’s performance shows huge volatility. A full percentage point of the 2.2% (raw) GDP growth is attributable to good crops. In other words, farming has greatly dampened deceleration this year.
As regards the contribution of the different sectors to growth, we can make the following observations.
Industry is spectacularly indisposed this year. This is partly a consequence of global economic downturn hence the local economy would badly need capacity expansions of various large enterprises.
The shock to the construction sector is petering out. A faster absorption of EU funds and the expected acceleration of home buildings may help the sector’s contribution to growth become positive again in the following quarters.
Services are the main beneficiaries of robust domestic demand, although the Q3 print here was weaker, the sector continues to play a dominant role in overall growth.
On the consumption side, we find that in parallel with the slackening industrial performance the export-import balance also failed to drive growth. The contribution by household consumption was smaller this time, but it remained the strongest fundamental factor. Interestingly enough, a great deal of production was directed east (at least the stats office failed to identify consumption in another way), and the last time inventories contributed to growth this meaningfully was six years ago.
Hungary would badly need stronger investment figures, given that the investment rate is approaching its all-time low. A sub-20% indicator is definitely not enough for the economy to set out on a sustainable convergence course. EU funds will give a boost to state investments next year again, but it would be important to see more investments in the business sector too.
Next year we can expect faster investment and consumption growth, as well as a negative contribution by net exports. As a result of these, economic output could grow by well above 3.0%. On the back of one-off growth drivers, we might just see the highest growth rate next year since the onset of the financial crisis.
