Diverging growth trajectories and monetary policy objectives in the major centres of the global economy

Executive summary

Autumn brought a noticeable deceleration in global economic growth due to the mounting geopolitical tensions, volatile financial markets, and moderate inflationary effects caused by low commodity prices and modest demand on the global markets, triggering the economic outlook for next year to turn bleaker. As far as the developed regions were concerned, only the US experienced an acceleration of growth after the temporary slowdown observed at the beginning of the year (Q3: +2.4% y/y), while recovery in the eurozone continued to be unimpressive (Q3: +0.8% y/y), and Germany and Japan suffered a considerable slowdown (Q3: +1.2% and -1.2% y/y, respectively). Among the BRIC countries, China and India had their growth rate stagnate around 7.5% and 6%, respectively, while that of Brazil and Russia sank below 1%. The Russian economy is especially vulnerable, and is facing serious difficulties due to sanctions following the war in Ukraine and plummeting oil prices. Short-term growth prospects in Europe continue to be bleak because of high unemployment rates, persistent deflation pressure, the continuing weakness of lending and the banking system, lasting economic tensions in the southern countries, and not the least the market loss caused by the embargos imposed on Russia.

Although after seeing a recovery in the US economy, the Fed closed the third round of its asset purchase programme (QE3) at the end of October 2014 after gradual tapering, this step did not cause a contraction of the liquidity of the international financial system, as in autumn both the Bank of Japan and the European Central Bank (ECB) took significant liquidity-boosting measures, with more to come. Decided on in June, the ECB launched its EUR 1 000 billion Targeted Longer Term Refinancing Operation (TLTRO) in September by allocating EUR 83 billion via auctioning. Considering the increasingly gloomy economic outlook of the eurozone, it cut its prime rate by an additional 10 basis points down to 0.05%, and announced in October the purchase of covered bonds and asset-backed securities. Partly due to the monetary policy stimulus measures, and partly due to Europe and Japan having considerably less positive growth prospects than the US, both the euro and the Japanese yen started to depreciate considerably against the US dollar.

Despite vigorous investment appetites in autumn, the markets responded nervously to deteriorating real economic figures and mounting geopolitical conflicts. Up to mid-October, investors were more risk-averse than not, which mainly hit stock markets and the currencies of emerging countries, while developed-market government bonds — especially US and German ones — were in high demand throughout autumn, leading to a considerable decline in yields. Positive figures in the US economy caused a noticeable upturn in risk appetites from mid-October onward, and so the world’s major stock markets, especially the US ones, began a volatile but persistent upward climb. In an environment characterised by low interest rates and yields, the interest rates on developed countries’ commercial bank loans, too, stagnated or decreased even further. However, there is a major difference between the two sides of the ocean in terms of lending activity, which is also reflected in the different expectations of these two regions regarding economic growth: while in the US, corporate loans saw an annual growth of 11.9% in October, in the eurozone they sank by 2.4%, and at the same time, real estate and consumer loans, respectively, shrank by 0.1% and 1.2% in the eurozone compared to a growth of 2.7% and 6.7% in the US.

Although Hungarian economic growth is among the fastest in Europe, the effects of a detrimental external environment are also reflected in the slightly slowing pace of growth and development of the components of the Hungarian GDP. In Q3, deteriorating foreign market conditions caused a slowdown in the growth rate of Hungarian exports, while imports rose due to increasing internal consumption, and as a sum of these factors, net exports diminished economic growth — which stood at 3.2% y/y — by 1.7 percentage points. Gross fixed capital formation grew by 16.5% between January and September 2014—due primarily to public infrastructural developments from EU funds and, to a lesser extent, to corporate investments — contributing 3.0 percentage points to GDP growth. While there was a high willingness to save (Hungarian households’ financial assets grew by almost HUF 900 billion in the first ten months of the year), as well as considerable debt elimination (their debts decreased by HUF 217 billion in the same period), households’ actual consumption in Q3 grew slower than expected (+1.1%), and in a quarterly comparison it actually fell (-0.5%) despite a favourable labour market, inflation environment and rising wages. However, based on the Hungarian consumer confidence index, the growth in household purchases could stay high in the long term even in the coming quarters, which could be further supported by the consumption-boosting effect of the foreign currency debtors’ package adopted in autumn. As a result, with the slowdown in investments household consumption could become the new engine of Hungarian economic growth in the next year.

On the production side of the GDP, the industry grew at a slowing rate, by 5.6%, the services sector by 1.7% and agriculture by 10.8% in Q3, while the two previous key drivers of growth — manufacturing and construction — contributed by a mere 1.5 percentage points to the growth of the gross domestic product. Their slowdown was due in part to the end of the previous EU programming period, as well as to deteriorating external conditions, and these same factors could hold back growth trends also in 2015.

Although there has been no fundamental turning point in corporate lending, there has been some degree of improvement, which could enhance the conditions for growth: in the first ten months of 2014, the total amount of corporate loans rose by HUF 29.2 billion (0.4%). As far as transactions were concerned, new forint loans exceeded repayments by HUF 159.4 billion, thanks to a significant part to the Funding for Growth Scheme of the Central Bank of Hungary, which gained momentum in the second half of the year. Meanwhile, the total amount of retail loans contracted by HUF 128.3 billion (1.9%). The pricing of forint loans has been reflecting the central bank base rate’s sinking to a historic low: in October, average interest rates on long-term corporate loans melted to a new record low of 4.50%, 82 basis points less than in December 2013, while that of forint-denominated retail housing loans sank from 9.67% to 8.38% — another historic low — in ten months.

The acceleration of economic growth can be also detected in labour market figures: between July and October 2014, the unemployment rate in Hungary sank to a pre-crisis level of 7.1%, with the number of employed people rising by 192.2 thousand. The improvement in labour market indicators was due largely to public works and the 88.4 thousand new jobs created in the industrial sector.

Although consumer prices in Hungary were down 0.1% (y/y) in the first ten months of 2014, Hungarian monetary policy is still not threatened by any significant risk of deflation. The underlying inflation indicators (core inflation, tax-adjusted core inflation) persistently fluctuate in a narrow band (around 1.5%), which is an indication that a positive but moderate inflation environment is to be expected in the long term.

The balance indicators of the Hungarian economy continued to improve. Based on financial accounts data, the financing capacity of the national economy amounted to 6.3% of the GDP in the 12 months prior to Q1 2014. Households and non-financial enterprises continue to be net savers (at 5.9% and 3.4% of the GDP, respectively), while the financing needs of the general government reached 3.0% of the GDP in the one-year period ended in Q2 2014. Based on data for the first ten months, the government deficit target for this year — 2.9% of the GDP — will be achievable, and while there are a few risk factors, the even stricter 2015 budget deficit target of 2.4% seems feasible as well. Based on preliminary data, the general government gross debt was around 83.0% between July and September. In November, the country repaid EUR 2 billion to the EU, so the indicator could be around 81.0% at this point, and the late-2013 debt level (79.4%) seems achievable.

With the base rate at a historic low of 2.10% after a 20 basis point cut in July, the Monetary Council of the Central Bank of Hungary finished its monetary easing cycle launched in August 2012. The combined effect of the low inflation rate in Hungary, the relatively strong global risk appetite, and the resulting rise in Hungarian asset prices and decline in the risk premium have created favourable conditions for a loose monetary policy. Over the next months, loose monetary conditions could persist in Hungary, while in the second half of next year, the impact of global monetary tightening on Hungarian asset prices could lead to interest rate hikes in Hungary as well.

Favourable investor sentiments, solid economic foundations, the continuation of fiscal rigour and the pricing out of expectations regarding a central bank interest rate hike led to a drop that resulted in historic yields on the Hungarian government securities market in autumn: between September and November, discount treasury bill yields fell by 55–59, and yields on 5-year and 10-year bonds by 36 and 87 basis points, respectively. The depreciation of the forint in H1 was followed by a correction between July and November 2014, making the forint the best-performing currency in the region. At its 28 November exchange rate (306.8 HUF/EUR), the forint had strengthened by 0.8% against the euro since the middle of the year. This year the forint–euro exchange rate followed a far weaker trajectory than was expected based on the real economic outlook, as the record-low base rate eroded the yield premium on forint assets. Over the next months, the country’s economic growth rate — which is above the European average — and budgetary discipline could continue to lend support to the forint, as could the ECB’s monetary stimulus measures, but the planned UK and US interest rate hikes could weaken the forint. Thus, by the end of 2015, a moderate strengthening of the forint to an exchange rate of 305–310 HUF/EUR can be expected.