Tuesday, March 18, 2008

Hungary Construction Output January 2008

Hungarian construction resumed its long march downwards in January, since year on year output plummeted by 27.4%, according to both unadjusted data and figures adjusted for working days, according to data from the Central Statistics Office (KSH) this morning. This follows the 20.8% yr/yr decline in Decmber and a 4.0% fall in January last year. There was a 5.9% rise in output month on month over December according to seasonally and working day adjusted data. Thia compares with a 1.4% m/m rise in December over November, and a 1.1% fall m/m in January 2007. So there is some slight improvement in the underlying trend, although it would be very premature to attribute any importance to this at this stage, since all sorts of factors - like the weather, and this winter being milder than the last one or whatever - can be having an impact here.



To get a better picture of what is happening we could look at the quarterly construction activity index over the last few years, where - if we take a glance at the chart - we will see that total activity peaked sometime in 2005, since which point the overall trend has been steadily down, and I see no compelling reason why that tendency is likely to change anytime soon.



Now for the details. According to the KSH release:



The building of complete constructions was down by 31.6% yr/yr in January, and this compared to a 28% drop in December and a 14.3% decrease in January 2007. Building installations were down 12.7% yr/yr in January as compared with a 3.9% fall in December and a 16.8% jump in January 2007. Completed buildings dropped by an incredible 43.7% yr/yr, as compared with a 1.9% fall in December and an 18.1% rise in January 2007.

The stock of orders at the end of January (HUF 674.8 bn at current prices) was down by 29% from a year earlier. The stock of orders for buildings (which totalled HUF 334.7 bn in Januray) was down 15.5% yr/yr, which compares with a rise of 9.4% in December and a rise of 6.9% in January 2007. For civil engineering the stock of orders was down 38.6% yr/yr (to HUF 340.1 b), which compared with a drop of 53.2% in December and a 46.1% drop in January 2007.

The volume of new orders in the construction industry as a whole (at HUF 129.1 bn) was up by 49.5% which compares with a 1.2% rise in December, and a sharp drop of 61.8% in January 2007.

The change in the stock of new orders for buildings was much less positive, as this was down by 24.8% in January, following a 4.3% yr/yr increase in December and a decline of 5.4% yr/yr in January 2007. New orders at current prices were down to HUF 42 bn from HUF 116.2 bn in Dec.

At far as civil engineering is concerned the picture was much brighter since there was a massive 185.6% leap as against a drop of 3.8% in Dec and a plunge of 81.8% in January 2007.

Unfortunatley this is the one-off impact of a major contract sealed in January for the extension of the M6 motorway. In this sense we can see why the increase in total orders look vaguely positive, since a one off civil engineering contract to some extent compensated for the continuing decline in domestic housing construction. This is liable to happen from time to time with the arrival of EU funding, but since the general fical direction is towards tightening we should not be expecting to much positive news in this department.

The value of total construction industry production was HUF 87.6 billion in January, down from HUF 205 bn in Dec and HUF 115.3 bn in January 2007.
Posted by Edward Hugh at 5:13 AM

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Spotlight On Hungary

Welcome to the Eastern Europe Economy Watch Blog. By clicking the older posts link (at the foot of the page) you will be able to leaf through the normal chronological blog posts. But first we have our country of the month feature where we would like to present some charts which provide background data we hope will help the first time reader better assess and get to grips with the general argument being presented on the blog. Below you will find charts for Hungarian male life expectancy, fertility, quarterly GDP growth, inflation, household demand, retail sales, and import and exports growth. Please click on thumbnails for better viewing.

On the left you can see a chart for Hungarian male life expectancy, and on the right there is one showing Hungary's population development. Just why such factors are important, and need to be taken into account along with more standard macro economic data in order to understand what is currently happening in Hungary and what might subsequently spread across Central and

Eastern Europe can be discovered by reading my Hungary analysis:Just Why Is Hungary So Different From the Rest of the EU 10?The basic arguments being advanced here are that long term fertility and life expectancy do matter, since in the long run they condition the labour force and consumption patterns, and with these inflation and internal demand.



Above left you can see Hungarian ferility, and above right the evolution of the population median age, which are also key parameters, since they influence saving and consumption, and with these internal demand growth. On either side here you can see charts for inflationand quarterly GDP.


Next on the left we have a chart for recent movements in private internal consumption (which shows us the state of internal immediate consumption demand) while on the right we can see changes in constuction activity, (which serve as a nice proxy for fixed capital formation). Finally the chart on the bottom left shows a comparison of Hungary's trade balance 2006 and 2007,


while on the right you can see the evolution in non-forint mortgages for immediate consumption purposes. Arguably these are all the data points you need to understand my lengthy post on why we face a possible recession in Hungary, and why post-recession Hungary may be converted into yet another export dependent economy.


2008 Forecasts: The OECD in December revised their 2007 Hungary forecast down to 1.8%, and 2008 to 2.6%. These numbers are very hard to accept. I will be very surprised if we see calendar year 2000 as high as 1.8%, but more to the point 2.6% seems to be assuming a strong rebound, an assumption for which there is no real substantive evidence. In particular even to get what growth we have been getting in 2007 the Hungarian govenment has been running a deficit of around 6% of GDP. This is going to tighten yet further in 2008, so there is no supportive fiscal environment. And as I keep arguing, it is very hard to see a supportive monetary one. The IMF in their October World Economic Outlook also put a similar figure of 2.7%, while the EU commission in November 2007 came in with the same 2.6% as the OECD.

Perhaps the prize for the most exaggerated prediction here must go to GKI Gazdaságkutató Zrt, who argue that Hungary should expect the incredible annual growth rate of 3.5%. My own view is much more nuanced. I think I am reasonably confident in holding to my recession forecast for 2008, although of course, "recession" does not mean negative growth for the whole year (technically it is simply 2 consecutive quarters of negative growth), so we might then go on to see what, between 0.5 and 1% growth over whole year 2008 (and the only really doubt is whether the contraction starts in Q4 2007, or in Q1 2008). But it is what happens in 2009 and 2010 that matters really, and at this point so many variables are in play (and interrelated ones to boot) that I can only say I envy those who have the courage - or the temerity - to stick their necks out). And of course, if we get a large correction in the value of the forint, then all those carefully weighed and weighted forecasts will, without a shadow of a doubt, go straight and directly off into the bin.