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Saturday, September 20, 2008

Hungary: Wages Up and Construction Activity Down In July

Wages in Hungary continued to rise more quickly than inflation in July, though the difference was not as great as in June. Gross wages rose by 7.8% year on year in July, down from the 9.7% rate registered in July, according to the latest data from the Central Statistics Office (KSH). On the other hand, bonus-adjusted gross wage growth in the private sector - which is the Hungarian central banks favourite wage growth indicator - accelerated to 9.3% from 8.9% in June. Given that inflation was running at an annual 6.7% in July this mean that on this measure real wages were up 2.6%. Net real wages including bonuses, in contrast rose by a mere 0.2% yr/yr.

Taking January to July as a whole gross wages were up 8.1% , while net wages increased by 7.2% (year on year) . Taking the private sector alone, gross monthly wages rose by 8.3% year on year in July, down from an 8.7% rate in June, while in the public sector the rate of increase slowed much more significantly, to 7.1% from 12.7% in June. The decline in the gross monthly wage in the private sector follows the recent trend, since year on year growth has been consistently below 9.0%.

In general the central bank will probably welcome the general trend downwards, since wage increases beyond productivity obviously constitute inflationary pressures. There are however still two interesting questions to which we do not really know the answer. The first of these is that it is very hard to assess the impact of any wage "whitening" on the pubished numbers. The second is why it is that even though private sector ex-bonus wages increased by an annual 9.3% in July (over 8.9% in June) bonus payments remained so low. Companies were obviously scaling back on bonus payments in July, and looking at the weak performance in industrial output in the export sector in July might we find the explanation for this? We could also ask ourselves whether this is simply a one of "bad month", or whether, as the Western European economies slow this is actually an indication of what we may see in the future.

Inflation Slowing

Hungarian inflation slowed in August as oil and food costs, which have buoyed consumer-price growth over the past year, started to ease back. The annual rate fell to 6.5 percent from 6.7 percent in July. Month on month, consumer prices fell 0.3 percent over July.

Decreasing global energy and food prices have raised expectations that the inflation rate will now gradually fall back toward the central bank's 3 percent target. Food prices, which jumped 2.2 percent on a monthly basis last September as inflation began to quicken globally, fell by the most in three years in August. They were down 1.5 percent, dropping for a third month. A 9.9 percent increase in household natural gas prices on July 1 added 0.3 percent to the August figure and prevented inflation from slowing further. Oil prices, which have fallen over 30 percent since mid-July, also point in the direction of a furtherdrop in the inflation rate.

The strengthening of the forint, which gained 11 percent against the euro in the past six months has helped contain prices. The price of durable goods fell for a fifth month in August. Hungary's central bank has kept the two-week deposit rate at 8.5 percent for three months, double the rate in the euro region, after following a one percentage point rise to curb inflation and underpin the forint.

Employment Remains (more or less) Stagnant

One thing the Hungarian economy is NOT doing to any great extent is creating employment. The number of employees in companies employing at least 5 people and the public sector combined dropped by 0.5% year on year in July to hit 2.755 million. This followed a 0.9% annual drop in June. This process is only natural as the Hungarian population declines, but of course it does mean that the only real way the Hungarian economy can grow is by increasing productivity, and that in June something like the first 1% of productivity improvement was eaten up by diminished employment. Clearly the answer to this is to increase labour force participation rates, and this sounds fine in theory, but we are a long way from seeing it happen in practice.

The distribution of the labour force is changing, however, since the number of employees in the private sector rose by 0.3% year on year in July but decreased by 3.5% in the public sector. On the other hand, and to put all of this in some perspective, there are now over 100,000 fewer employees in the private sector than there were in June 2003.

Construction Drops Back Again In July

Construction output fell more strongly in July - down by 11.8% year on year, following an 8.1% drop in June. Taking the number of working days into account, the decline was 12.8% in July, and 9.0% in June.

Adjusted seasonally and for working days, output contracted by 2.8% month-on-month from June, following a 5.5% month on month contraction in June. July was the third consecutive month when construction industry output dropped. Output in January-July was down 10.9% over the same period of 2007.

While the index will probably settle down a bit in the autumn, given the base effects due to the strong plunge in output last autumn, we are unlikely to see any short term improvement in construction output, and given the ongoing turmoil in the sector globally the position will more than likely continue to deteriorate for some time to come. Maybe someone will one day wake up to the fact that with an ever smaller and older population in the longer term you need fewer and fewer houses. As can be seen from the chart below, the level of construction activity peaked in Hungary in 2005 (along with domestic private consumption growth), and given the population situation, and that civil engineering will be continuously constrained by government budget commitments to health and pension programmes in an ageing society, it is very unlikely that we will ever again reach that level. Remember here, we are talking about the RATE of output, and not the STOCK of buildings, bridges, motorways etc. I simply can't see why none of this can enter the mindset of those who are sitting stoically, arms folded, waiting for the "inevitable" upturn in Hungarian domestic consumption. Less retail sales, less building, less people working, this is, I think, what you should expect with a declining and ageing population. And, of course, we are about to see this phenomenon repeated in one society after another as the process spreads. Hungary is simply unfortunate enough to be among the first.

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