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Monday, June 30, 2008

Employment and Unemployment in Hungary March-May 2008

Hungary's unemployment rate for the 15 to 64 age group held constant at 7.8% in the March-May period, the same as in February-April, according to data from the Central Statistics Office (KSH) earlier today. The number of those unemployed was 321,700 and the number of employed was 3,827,200. This latter figure compares with 3,820,800 in February-April and 3,890,500 in the same period in 2007. The number of unemployed dropped by 1,700 from the previous 3 month period but was up by 14,200 from the reading in the same period of last year.

The participation rate for the 15-64 population was 61,1% in March-May, up from 61 in February-April, but down 0.6 ppts from the same period in 2007. The employment rate of the population aged 15-64 was 56.3%, as against 56.2% in the previous 3 month period and down 0.9ppt from March-May 2007.

The KSH said 48.4% of all unemployed have been seeking jobs for a year or more (up from 47.3% in the previous 3 months). The average duration of joblessness was 17.8 months, up from 17.1 in the previous 3-m period.

So as we can see from the chart below, despite the fall in the number of unemployed, levels of employment are actually now substantially down from where they were one year ago.

The reason for this is quite straight forward, the 15-64 working age population in Hungary is now in more or less continuous decline, while the participation rate among that population is down slightly.

Now the supply-side macro economics of what happens next are actually remarkably simple. Either Hungary significantly raises productivity among the work force as it contracts, or it substantially increases employment participation rates among the working age population (or both), or headline rates of GDP growth will remain very low.

Now the latest year for which we really have productivity stats is 2006, and as can be seen from the chart below - which is expressed in purchasing power standards relative to other EU countries (Eurostat data) and is only for comparative purposes - while there was quite a burst of productivity improvement between 1999 and 2004, the rate actually started to slow between 2005 and 2006, and give the substantial growth slowdown in 2007, it is very probable that this slowdown continued in 2007, although we don't yet have actual data.

The OECD on the other hand do present year on year changes in easy manageable form, and again we can note a slight slowing in productivity growth since 2004. So this is the task ahead, to turn this trend round.

Thursday, June 26, 2008

Hungary Retail Sales Recover Slightly In April

Hungarian retail sales rose by 0.4% month on month in April, following a 0.5% decline in March, according to data adjusted for calendar and seasonal effects. The Central Statistics Office (KSH) reported a 1.5% year on year fall in April, as compared with a 3.5% fall in March.

Despite the fact that the data was better than some expected the release still confirms the view that any recovery in domestic consumption is likely to be slow and drawn out affair this year following the austerity package-induced contraction in 2007.

As can be seen from the above chart, even though sales did improve slightly over March, they are still languishing down at a very low level.

This reading comes ohot on the heels of (and may partially help to explain) the surprising decision of Hungary's Central Bank Monetary Council to hold the benchmark rate on hold at 8.50% earlier this week. Market participants (as well as yours truly himself) had been more or less unanimous in expecting a 25-basis-point rate hike, especially after the last wages data. Of course, when you look at the sort of internal demand reading we see in retail sales it isn't hard to reach the conclusion that higher interest rates may well not be precisely what the Hungarian domestic economy needs right now, but then the central bank is in a very difficult position here, with domestic consumption needs to think about even as inflation continues to run well above target.

The structure of Hungarian growth has however changed enormously in recent years, and that I think is what many commentators are missing about the present conjuncture. In a pattern we have already seen in other ageing societies like Japan, Germany and Italy, private internal consumption seems to have already "maxed out" as a driver of headline GDP growth - according to my estimates in the second half of 2002 (see chart below, where the difference between "private" and "total" household consumption is simply that the latter includes government transfers, which have of course been affected by the adjustment programme hence the more rapid decline), but in any event well before the current austerity programme was introduced in the autumn of 2006.

It is my interpretation of the situation that the increase in government fiscal deficit in 2005 and 2006 was in fact a knock on consequence of this decline in private consumption as the goverment attempted to maintain momentum which was being lost (as we have also seen in other high govt debt to GDP countries with low private dmestc consumtion growth like Italy and Japan).

Investments in the Hungarian economy were down by 4.8% year on year in the first quarter of 2008. The volume of investment – according to seasonally adjusted indices – was 1% lower than in the previous quarter. Construction investments fell by 15.5%, while investments in machines and equipment were up by 8.4%.

After the impact of last years drought, the agricultural sector is now growing again (and in particular given the rapid rise in food prices).Since this sector is highly volatile it can have substantial impacts on short term GDP growth rates despite its small weight in the whole economy - last year it brought the headline data down and this year it may well pump it up. Most analysts expect a good harvest this year, but this is precisely why Q1 growth estimates are a little uncertain, since the real value of current operations will not be known before the middle of the year. For this reason, the current data may even be revised upward if crops prove to be as good as is being forecast this year.

So if there is a stable external environoment (in the eurozone) - something which is open to question - we could expect a slight pick-up in GDP growth during the year on the back of agricultural output and continuing exports, but it seems right now there is no spectacular change of pace in sight. Any economic recovery is going to be ``slow'' (especially given the inflation problem, and the very tight monetary policy being run by the NBH) and household consumption and investments are unlikely to improve dramtiaclly, and certainly cannot be expected to replace exports as the growth engine (as central bank President Andras Simor recently suggested) and investment will be very much driven by the export sector much as we have been seeing in Germany in recent years. The chart for total domestic use (which is the sum of private and public consumption demand and capital formation - or if you prefer investment) makes this abundantly clear. Without the improvement in the trade balance there is no growth whatsoever in Hungary at the present time. I think this is quite an important result, and one which people need to think about a lot, since if this is not understood none of the 1001 "remedies" are ever going to work. Hungary is an "elderly" society with a declining and ageing population, and the macroeconomic consequences of this need to be assimilated and understood.

Of course, we have strong downside risks on this scenario, since any deterioration in Germany, or increase in global risk aversion can unsettle a Hungarian economy which continues to remain precariously perched between heading up and heading down.

Essentially it seems to me that with the forint trading band now abolished the currency will be very likely to come under sharp attack if any indication is given of downward movements in interest rates (and this despite the recent record highs in the currency, which may well have been about taking the "ride up" on recent NBH decisions) and especially if Hungary's stagnant economy shows no signs of revival, and - with interest rates at the current level and fiscal policy tightening, and the eurozone slowing - it is hard to see just how it can rebound beyond a token surge in GDP growth (where would - apart from agriculture - the growth come from).

True, inflation remains stubbornly high:

but domestic demand is still declining. Retail sales, for example:

or construction:

and the rate of increase in industrial output has weakened considerably:

while GDP is now almost stationary:

Of course, any conjecture about the future path of the Hungarian economy evidently has strong downside risks attached to it, since any deterioration in Germany, or increase in global risk aversion can only further unsettle a Hungarian economy which continues to remain precariously perched between heading up and heading down.

Tuesday, June 24, 2008

Poland's Retail Sales May 2008 and Central Bank Policy Preview

Polish retail sales rose more than many observers expected in May, adding to speculation that central bank policy makers will increase interest rates tomorrow as domestic demand continues to fuel inflation. Retail sales rose an annual 14.9 percent, compared with 17.6 percent in April, according to data from the Warsaw-based Central Statistical Office earlier today.

Demand for consumer goods, in part a by product of record high employment and the fastest wage growth in eight years, has been driving inflation in Poland, boosting the impact of the surge in oil and food prices. Inflation has remained above the central bank's target of 2.5 percent for eight months.

Poland's annual inflationrate rose to 4.4 percent in May, up from 4 percent in April. Consumer prices rose a monthly 0.8 percent, compared with a gain of 0.4 percent a month earlier.

Wages in Poland's corporate sector rose 12.6% on the year in April, above forecasts and up from 10.2% in March, according to data released Monday by the Central Statistical Office. On the month, April average wages fell 0.2%, following March's 3.7% monthly rise. The figures are preliminary and cover Polish companies with more than nine employees.

Total employment at firms with more than nine employees amounted to 5.39 million in April, up 5.6% on the year.

Poland's jobless rate declined to the lowest rate in almost a decade in April, falling for a third consecutive month as robust economic growth boosted hiring. Unemployment declined to 10.5 percent from 11.1 percent in March, according to the methodology used by the Central Statistical Office. About 1.61 million Poles were registered as unemployed at the end of April, the office said.

Using the EU harmonised methodology there were 1.313 million Poles unemployed in March (the latest month for which we have such data) and the seasonally adjusted unemployment rate was 7.7%.

Construction output was up by 22.8% in April.

Most observes feel that the central bank Monetary Policy Council will lift the benchmark seven-day reference rate by a quarter of a percentage point to 6 percent tomorrow. Policy makers have lifted the rate to 5.75 percent in seven increases since April last year, when the rate was at the record low of 4 percent.

The Polish central bank rejected a bid to raise the benchmark interest rate a quarter of a percentage point last month since policy makers said they wanted to see the bank's inflation projection which is due this month, according to the minutes of the rate-setting meeting.

``Most members of the Council decided that the full assessment of the risk of persisting inflation'' will be ``possible after the release of the central bank's June inflation projection,'' the bank said in minutes from the May 27-28 meeting. ``This argument justified, in their opinion, leaving interest rates changed.''

However there is one possible snag with the interest rate rising scenario. The question is, what impact will such a move have on the appetite among Poles to contract debt in euros rather than in zloty. There is a considerable market for non-zloty loans in Poland, although it is not at this point as extensive as the demand for forex loans in places like Hungary, the Baltics or Croatia, and the appetite for such loans this does not seem to have grown disproportionately vis a vis zloty loans (both have been growing very fast) in recent years.

And there has long been a healthy demand for non zloty mortgage finance.

But interestingly, if we come to look at the comparative year on year changes between the two possibilities in terms of mortgage finance, what we will see is that while the zloty loans were gaining ground when monetary policy in Poland was relatively loose, since the National Bank of Poland started tightening in a serious way last autumn, the situation has inverted, and the year on year rate of increase in forex loans has been accelerating, while the rate of increase in zloty mortgage lending has been slowing. If the Polish central bank needs to continue to tighten and the ECB (despite Trichet's most recent sabre rattling) starts to loosen later in the year, then it will be interesting to follow the comparative path here, since the position in Poland gives a pretty good birds eye view of the effectiveness of single country monetary policy (or its limits) in the context of today's globalised world.

Monday, June 23, 2008

Hungarian Central Bank Leaves Interest Rates on Hold June 2008

Hungary's Monetary Council surprised everyone this morning by leaving the benchmark rate on hold at 8.50%. Market participants (as well as yours truly himself) had been more or less unanimous in expecting a 25-basis-point rate hike, especially after the last wages data. Of course, higher interest rates may well not be precisely what the Hungarian domestic economy needs right now, but then the central bank is in a very difficult position here, with domestic consumption weak at the same time as inflation continues to run well above target.

There is some speculation that political pressures may have been mounting on the NBH, as the forint strongthened against the euro and this could have been one of the factors which influenced the Monetary Council in today's decision. The forint has strengthened 5% against the euro since April. The problem is that with the ECB possibly raising in July, some of this ground may well now be lost, and then we will see the inflation benefit unwind.

Unsurprisingly the immediate market response was a weakening of the forint on the interbank market. Within five minutes of the decision being announced the HUF had fallen back to 240.20/50 to the EUR from around 238.50, only to gained back some strength to around 239.50 by 14:30.

Monday, June 2, 2008

Romania GDP Q1 2008 (Preliminary)

Romania's economic growth accelerated more than economists expected in the first quarter of 2008 as credit growth and rising wages boosted consumption, threatening to push up inflation even further.

Gross domestic product grew at an annual rate of 8.2 percent in the first quarter, the fastest pace since the third quarter of 2006, according to the latest data from the Bucharest-based National Statistics Institute. This compares with 6.6 percentrate in the fourth quarter of 2007.

The rate of growth in the Romanian economy - which is the second-fastest after the 8.6% achieved in Slovakia among the 20 European Union members that have so far released first-quarter reports, may well drive up inflation even further despite the best monetary policy efforts of the central bank. Consumer prices rose a two-year high annual 8.6 percent in April.

Romanian producer-prices, which are normally regarded as an early predictor of inflation, rose at close to their fastest pace since 2004 in April as energy prices increased a weaker leu raised the cost of imported raw materials. The cost of goods produced in factories and mines was up 15.5 percent in April over April 2007. This compares with a 15.6 percent rate in March. Prices rose 1.1 percent on the month, after rising 1.7 percent in March over February.

The central bank, which raised its main interest rate five times since October, has warned that inflation may not slow until the third quarter.The Banca Nationala a Romaniei has raised its Monetary Policy Rate to 9.75 percent currently from 7 percent eight months ago and next meets to decide on the rate on June 26.

The leu gained as much as 0.8 percent to 3.5984 per euro following the news, hitting its strongest level since April 29, up from 3.6257 on May 30.

First quarter was described last month as "the best for the Romanian economy in modern history'' by Finance Minister Varujan Vosganian who attributed the phenomenon to rising wages, increased tax collection and growing foreign investment.

Net wages grew at an annual rate of nearly 18 percent in March while household debt has been surging at around 64 percent year on year.

In April 2008 non-government credit in Romania was up by 2.5 percent from March (or 2.0 percent in real terms), and reached RON 168,734.1 million according to the latest data from the national bank. RON-denominated loans were up 3.4 percent (2.8 percent in real terms) and foreign currency-denominated loans rose by 1.8 percent when expressed in RON and by 3.2 percent when expressed in EUR.

At end-April 2008, non-government credit was up year on year by 64.4 percent, or 51.4 percent in real terms, on the back of the 44.5 percent increase in RON-denominated loans (33.0 percent in real terms) and the 85.8 percent advance in foreign currency-denominated loans expressed in RON (when expressed in EUR, forex loans expanded by 68.2 percent).

RON denominated household credit was up by 42% year on year in April, while household foreign currency-denominated loans were up at an annual rate of 137.7%. The rate of increase in these latter has slowed a little in recenent months from the peak, so the whole process may now be slowing. We will have to wait and see.

Romania's unemployment rate fell in April as farmers and construction companies boosted seasonal hiring because of favorable weather conditions. The unemployment rate fell to 3.9 percent in April from 4.2 percent in March, according to data from the National Labor Agency. Unemployment fell from 4.5 percent a year earlier.

Romania's jobless rate has been falling steadily since last year when it joined the European Union, increasing investment in the nation of 22 million and allowing many Romanians to emigrate to find better-paying jobs in other EU nations such as Italy and Spain. A growing labor shortage and a booming construction industry has helped boost average net monthly wages in Romania by an annual 17.7 percent in March.

Retail sales expanded 11.2 percent from a year earlier, government tax collection rose 44 percent on the year, the construction sector grew 32 percent and increasing job offers lowered unemployment to 3.9 percent.

Vosganian also indicated that the government expects a large agricultural harvest this year, which may further accelerate growth. A drought last year destroyed a third of Romania's crops, shaving more than a percentage point off GDP growth last year, according to government estimates. Romania's statistics institute will provide a detailed breakdown of first quarter economic growth on June 5.