Accelarating Hungarian economy, improving external environment

Executive summary

 

After decelerating in early 2013, global economic growth picked up speed in the second half of the year relying on the improving performance of both developed and emerging countries. Global trade also responded by positive expansion with global exports up 2.8% in Q3 after a long period of stagnation between early 2012 and mid 2013. Business sentiment improved in each major segment of the global economy in the second half of the previous year. The US economy moved along a stable growth trajectory while the eurozone embarked on recovery after spending a year and a half in recession (despite quarter on quarter improvements registered in two consecutive quarters, a decline is expected on year-on-year basis) and the Chinese economy accelerated once again in Q3 after the slowdown in H1.

Subdued business activity and declining energy and food prices brought moderate inflationary pressures only in the global economy. The price per barrel of Brent crude remained relatively stable year on year and closed at USD 110.3 and the good harvest also pushed the price of agricultural products down in the course of the year. Accordingly, inflation had reached around 1% in both the US and the eurozone by the end of the year.

In 2013, strengthening confidence in the sustainability of global recovery and expectations concerning the continuation of monetary easing applied by major central banks set the direction of financial markets in 2013. The US prime rate has stood at 0.25% since late 2008 with the Fed flashing the first signs of the intention to taper its monthly asset purchases worth USD 85 billion in May and finally deciding in December to actually go for USD 10 billion worth of tapering in January 2014. The European Central Bank cut the base rate by 25 basis points to the record low of 0.50% in May only to lower it to 0.25% in November as deflationary risks mounted. All in all, both sentiment and liquidity were favourable in international markets in 2013. The yield on 10 year US and German government bonds rose by 126 and 64 basis points to 3.01 and 1.94 percent, respectively, with the yield on PIIGS government paper declining substantially, which led to the convergence of yields in the eurozone in the past year. The USD/EUR rate hovered in a band between 1.27-1.39 USD/EUR during the year and the closing rate (of 1.38 USD/EUR) meant that the common European currency had strengthened by 4.5% year on year. Several stock exchanges registered new record heights in the western world, the annual reclassification of investment portfolios bore down on asset prices in some emerging markets.

Corporate lending conditions eased in the eurozone on the back of a slow decline in interest rate levels and the moderation of interbank tensions. The average interest on long term corporate loans dropped gradually from 3.17% in the early part of the year to reach 3.12% in November against a backdrop of reduction of the portfolio of outstanding corporate loans (the portfolio was down 5.7% yoy in November).

The Hungarian economy grew by 0.6% in the first three quarters of 2013, which surpassed expectations. Growth accelerated incessantly with Hungarian GDP rising by 1.6% in Q4 (based on figures adjusted for seasonal and calendar effects), and the growth figure recorded at 0.9% for the period between July and September ranked fourth in terms of speed across the European Union.

The structure of growth was balanced, with economic recovery unquestionably fuelled by invigorated internal demand on consumption side of GDP starting Q2, hence GDP was up again after uninterrupted decline for eight consecutive quarters. Moreover, with recession definitely moderating in the euro area, Hungarian foreign trade could once again contribute positively to GDP growth between July and September.

On the production side of GDP, agriculture influenced the rate of GDP growth heavily last year in spite of its relatively low economic weight: the good harvest propelled the gross value added of the farming sector by 21.7% y/y in the first three quarters. The unfaltering descent (except for a single quarter) of construction output, which had begun in 2007, halted last year and after hitting the bedrock the sector recovered with relative dynamism owing first of all to community development projects (investments into infrastructure: road, rail, disaster prevention) - and the base effect - with (non-residential) industrial facilities topping the league in building construction. In Q3 2013, the upturn of external demand broke the declining trend which had lasted for five consecutive quarters as the gross value added of manufacturing was up 0.4% (yoy). All in all, based on the first three quarters of the year, the performance of the sector fell 1.4% short of that of the corresponding period in 2012.

Unemployment rate had sunk to a 5-year low by late 2013 (and amounted to 9.3% between September and November), whilst the number of people employed topped 4 million for the first time since 2001. The improvement of labour market conditions relied on the level of public employment surpassing that of previous years, the launch of public work programs in the winter and the broadening positive impact of new jobs created by the market sectors (especially in the manufacturing sector).

 

During the second half of last year, Hungarian inflation rate dropped to a record low unprecedented for four decades with consumer prices up only by 1.7% on average in 2013.

The interest rate cut cycle launched by the Monetary Policy Council of the National Bank of Hungary in August 2012 persisted in 2013 and the base rate was reduced from 5.75% as the year began to 3.00 by December through a series of slashes at 25 basis points and by 20 basis points starting August (and sink to 2,85% in January 2014). The yield of Hungarian treasury bills in the secondary market adjusted to the downturn of the base rate by shrinking at a relatively even speed by between 236-247 basis points in 2013 whilst long term bond yields increased transitionally during the summer. The 10-year CDS premium sank from 316 points to 296 points with the yield on 10 year government bonds descending from 6.11% to 5.61% last year and the yield curve becoming steeper. With global investor sentiment relatively favourable, the HUF/EUR rate weakened by 2.0% year on year and closed at 297.0 HUF/EUR in December whilst the yield premium of Hungarian assets shrank considerably.

The interest on HUF denominated corporate loans fell to a record low during the previous year: the average interest rate on loans maturing between 1-5 years fell from 9.29% to 5.72%, whilst that on longer maturities dropped from 9.10 to 5.39%. HUF loans outstanding to non-financial companies rose by HUF 494.1 billion as a result of transactions during the first 11 months of 2013 along with a simultaneous melt-down of FX loans by HUF 378.8 billion, hence transactions boosted the portfolio of outstanding corporate loans by HUF 115.4 billion, owing partially to the effect of the Funding for Growth Scheme programme of the central bank.

With processes in the real economy and inflation taking a favourable turn, the internal and external balance of the Hungarian economy continued to improve. In Q3 2013, Hungary’s net foreign financing capacity reached 6.3% (of GDP) based on balance of payments data. Preliminary figures suggest that the annual fiscal deficit fell short of 2.7% of GDP and disciplined fiscal policy helped terminate the excessive deficit procedure of EC against Hungary during the summer. Maintaining economic equilibrium continues to be one of the fundamental conditions for sustainable GDP growth.