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Thursday, April 17, 2008

Hungary's Wages and Salaries Rise Sharply in February 2008

The forint fell again in Budapest this morning following a government report from the statistics off that showed that monthly average gross wages rose far more than expected in February, adding to the case for the central bank to raise what is currently the European Union's second-highest interest rate (after Romania). The data stoked speculation higher borrowing costs will damp growth in an economy that's already growing one of the slowest rates in the entire European Union (Latvia and Italay would be other candidates here for the "reverse poll position".

Hungary's monthly average gross wages soared by 13.4% year on year in February, according to the latest data from the Central Statistics Office (KSH). This increase follows a 1.5% decline in January. Net wages went up by 11.5% yr/yr in the second month of 2008, against a drop of 0.2% in Jan.

The forint weakened to 158.895 per dollar by 1:35 p.m. in Budapest, from 158.753 yesterday, when it had climbed to its highest level since December. It was little changed at 253.11 per euro, after gaining to a six-month high of 249.27 on April 14.

The slight moderation in inflation in February (down to 6.9% from 7.1% in January) and this substantial jump in wages mean that Hungary's real wage decline has come to a sudden stop. The 6.8% decline registered in January became a a 4.3% rise in Feb, which means that the rate of real wage decline is 1.7% for January-February taken together. In terms of net wages the 7.3% annual decline in January became a 4.6% annual rise in February. As can be seen from the chart below the turnround in pretty dramatic.

“This is a shockingly high number and points to wage growth acceleration in 2008, instead of the slowdown that the NBH was hoping for. Looking at the details the increase is fairly widespread, and cannot be explained by the minimum wage increases for employees with higher education."
István Zsoldos, Goldman Sachs, London

Perhaps it would be better if we strip the January data out of the picture altogether here, since the apparent decline in January was due to bonus payment distortions in the public sector.

Basically January wages in the public sector do not contain the entire 13th month bonus payout, but only its monthly proportionate share (one twelfth), as this bonus is now being distributed fractionally, and indeed some monthly instalments wrere already paid last year. According to the statistics office, they paid four of the 12 monthly wage bonuses last year and the remaining eight will be paid as of January this year.

If we look at the private sector alone, we get a more representative picture, and find that the gross average wage in the private sector rose by 14.4% year on year to HUF 187,350 in February, up from a 9.7% increase in January. In real - inflation adjusted - terms this means that year on year wages were up 2.6% in the private sector in January and 7.5% in February.

Gross average wage in the public sector was HUF 193,990, up 11.8% yr/yr, against a decline of 14.6% in Jan.

Recent comments from the MNB have highlighted the importance attached to this year's wage data in shaping monetary policy and so today's data will be hard for them to ignore and retain credibility, since they suggest - according to the logic of policy as it currently stands - more rate hikes rather than less. In light of this further 50bp rate hike to 8.5% could easily be on the cards at a meeting in the not too distant future.

"In our view, the current strong wage data clearly increases the chance of an April rate hike........the MPC will be ready to act in April and hike rates by 25bp due to the unfavourable developments in the underlying factors to inflation, such as private sector wages and market service prices. We expect 25bp rate hikes in April and May, increasing the base rate to 8.50%, while the rate cutting cycle is likely to be delayed until 1H09."
Eszter Gárgyán, Citibank, Budapest

The acceleration in private sector wage growth was largely driven by the financial services sector, where total wage growth jumped to 58% YoY in February, while regular wages accelerated to 13.2% YoY up from 4.5% in January. Eszter Gárgyán ( Citibank, Budapest) argues that the strong February financial sector data is partly the consequence of base period effects of previous bonus payments and an earlier wage hike and that calculating annual wage growth over a five-month period (October to February would give a milder, 5.7% YoY growth in the financial sector).

"In the financial sector, there was a major acceleration in wage payments ... and there was also a jump in the real estate sector. Looking at ex-bonus figures, real estate sector wages jumped most sharply. This is in partly due to the whitening of the economy. Many white collar workers were brought properly onto the payroll. Gross wage growth in the financial sector was almost 34 percent while real estate sector wages rose 15%."
Erika Molnárfi, KSH Statistician, Budapest

Of course viewed in another light the uptick in financial services wages should not surprise us at all in the light of the growing importance of the financial services secor in terms of GDP share - since this component has gone up from 16.64% of GDP in Q4 2005 to 20.99% in Q4 2007 (or over 4 percentage points in 2 years).

And this at a time when construction activity has been in almost total retreat. Naturally all those nice swiss franc mortgages people have been selling will have helped swell the bonus payout:

As will all those CHF personal loan mortgage refis, which have been busy running a horse and cart through the domestic credit monetary tightening plans over at the NBH:

Regular wages also accelerated in industry, mining, construction, tourism, restaurants, and real estate and business services in February, and remained above 10% in the retail sector. Bonus payments unexpectedly jumped in most of the service sector.

Perhaps even more significantly with all this wages growth taking place the number of employed in the whole economy dropped by 1.3% year on year to 2,736,900 in February following a 2.0% drop in January. Even in the private sector with 1,940,200 people employed there was a 0.1% year on year decline, while in the public sector employment was down 5.5% year on year to a total of 715,100 in February, which compares with a 5.8% fall in January.

This is why I earlier spoke of the Hungarian economy being in a condition of stagfaltion, since we have very little - if any, let's wait and see - GDP growth, negative employment growth, and yet significant wage and consumer price growth, which may well mean that even as the economy contracts - if we actually get to enter recession as the year advances (what out the decline in German investor confidence this week) - then the NBH may find it is still in a tightening and not in a loosening cycle.

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