F o c u s. Hungary s economic growth in Q3 2017

Transcription

1 Hungarian Development Bank s monthly report F o c u s Hungary s economic growth in The growth of the economy of Hungary accelerated in the third quarter of this year, bringing the country s per-capita GDP closer to the average of the eurozone: Hungary s gross domestic product grew.9% and 4.1%, quarter-on-quarter, and year-on-year, respectively. The dynamic growth was driven by among other factors positive expectations among the population and businesses, access to a wide range of EU funds and an increase in lending, as well as a low basis. The structure of growth was relatively well balanced: on the side of production the growth of GDP was powered by industry, construction and the services sector, while on the expenditure side it was driven by consumption and gross fixed capital formation. On the whole, Hungary s economy was pulled by domestic consumption; this was reflected by the fact that the dynamic of imports exceeded that of exports. December 217 In the third quarter of 217, the economy of Hungary expanded by 3.9% according to raw data, or by 4.1% according to data adjusted for calendar effects and for seasonal effects, year-on-year (Chart 1). The latter chart shows a three-year high growth rate. It is safe to say that in view of its components economic growth relies on a wide foundation on the whole. The structure of growth from the aspect of production Industrial output grew by 3.7%, in which the output of manufacturing increased by 4.9%, year-on-year in. Industry, and manufacturing specifically, grew faster than in the preceding quarter. The output of the secondary sector contributed.8 percentage point,.1 percentage point more than in Q2, to the 3.9% growth of GDP. The increase in industry s contribution to GDP resulted from higher than 1 year-onyear growth rates in about half of the sectors 1% -1% - - Chart 1: GDP growth* in Hungary * seasonally and calendar effects adjusted data Q1 26 Q3 26 Q1 27 Q3 27 Quarter/quarter (LHS) Year/year (RHS) - - Content In the third quarter, foreign trade was characterized by dynamic turnover and a positive balance... (Page 5) The dynamic of investments was at a historic high during the first three quarters... (Page 6) Domestic demand driving growth in industry and construction this year... (Page 7) The tertiary sector maintained its outstanding role among the key components of economic growth... (Page 8) The dynamic growth recorded in September in retail trade continued in October... (Page 9) Unbroken increase in wages continued in October... (Page 1) The annual increase in consumer prices remained below the target inflation rate... (Page 11) Domestic financial institutions reported stable returns on assets and equity in Q3 as well... (Page 12) A year of unbroken increase in the portfolio of corporate loans... (Page 13) The HUF remained stable against the EUR in November... (Page 14) Public finances remained stable in October as well, according to calculations based on the EU s method... (Page 15) Data close: Authors: Judit Mádi (Madi.Judit@mfb.hu) Zsolt Szabó (Szabo.Zsolt@mfb.hu) Publisher: MFB Hungarian Development Bank Private Limited Company Editor in chief: Szabolcs Vida Contact: Nádor utca 31. H-151 Budapest Tel.: Web: The views expressed in the analyses published by MFB Plc reflect the authors personal views and do not correspond in any circumstances to the Bank official views. The analyses are based on data obtained from credible sources but the authors do not take responsibilities for their authenticity. MFB Plc and the authors are not responsible for the accuracy of the forecasts.

2 concerned only the outputs of the vehicle industry and the chemical industry decreased during the third quarter, year-onyear (Charts 2-3, Table 1). The total value added by construction grew by 28. year-on-year, bringing its dynamic to over 2 during Q3. The upswing in construction continues to be powered by the growth in home purchases and construction, transfers from EU funds and economic policy measures (reduced VAT rate, the family housing support), however, the base effect has been decreasing (one year ago a mere 4. decrease was recorded in the construction sector). Despite its relatively small economic weight the segment added 1. percentage point to economic growth during the third quarter, a record high rate according to data released by the Hungarian Central Statistical Office (HCSO), dating back to The services sector maintained its dynamic growth, with a 3. growth rate in, year-on-year. Each segment expanded with the exception of public administration, education and health. Another positive fact is that this was the fifth quarter in a row during which the financial and insurance sector playing an outstanding role in financing the rest of the segments kept growing. The tertiary sector as a whole added 2. percentage points to the growth of GDP between July and September 217; the last time this sector made a higher contribution to economic growth was nearly four years ago, during the last three months of 213. The tertiary sector s contribution to economic growth outweighed that of industry for the seventh successive quarter and of the production-side components it remained the main engine of economic growth between July and September 217. The reason for this was that services are relatively more heavily reliant on domestic purchasing power which has been growing dynamically for a number of quarters now. The volume of the value added by agriculture dropped by 11. year-on-year, between July and September 217. Although the agriculture sector makes a relatively small contribution to GDP as a whole (2.9% during the first three quarters), yet the primary sector pulled up the overall economic growth by. during the third quarter of 217 (with a zero % agricultural contribution the GDP growth rate would have been 3.9% instead of 4.). The drop in agriculture s contribution did not come as a surprise in view of the 216 basis: the favourable results of the previous year negatively impact this year s statistics. Moreover, the effects of the damage caused by the April frosts continued to influence the output of agriculture in the second half of the year as well (Chart 2, Table 1). Of the various sectors, the output of agriculture a sector that is heavily dependent on weather conditions and is characterised by marked interim seasonal fluctuations within a given year has not yet reached the pre-crisis level of Q2 28 (Chart 4). By contrast, the gross value added by the tertiary sector (sector relying on domestic consumption), came to exceed the level recorded between April and June 28 by as much as 13.7%; so did the gross value added by industry, as it has been since the end of 216 (by 4. in ). The output of construction, a sector very much exposed to fluctuations in the influx of EU funds, not only reached that level by this year s summer but it Table 1: Economic growth and the components of economic growth in Production approach growth (year/ year) contribution to economic growth (percentage point) Expenditure approach growth (year/ year) contribution to economic growth (percentage point) Agriculture Final consumption Industry 3.7%.8 Construction Services Taxes less subsidies on products.6 consumption of households consumption of government Gross fixed capital formation Changes in inventories Export 4. Import Net export -3.2 GDP 3.9 GDP 3.9 percentage point 5, 2,5, -2,5-5, -7,5-1, Chart 2: Contribution to GDP growth (production approach, y/y) 5, 2,, -2, -5, -7, -1, Agriculture (LHS) Industry (LHS) Construction (LHS) Services (LHS) GDP (RHS) Chart 3: Production* of the manufacturing sub-sectors and their shares in industrial production () Sources: HCSo, MFB 18.9% % % % % 2.1% % Manuf. of coke & refined petroleum Metal prod. Manuf. of pharmaceuticals Computer, electronic prod. Manuf. of machinery Weight within industry (RHS) Growth rate (y/y, LHS) Textiles, leather prod. Rubber and plastic prod. Chart 4: The production of GDP* (Q2 28 = 1) * seasonally and calendar effects adjusted data Wood and paper prod. Q2 28 Q4 28 Q2 29 Q4 29 Q2 21 Q4 21 Q2 211 Q4 211 Q2 212 Food, beverages, tobacco 27.1% Transport equipment Chemical prod. Agriculture, forestry and fishing Industry Construction Services GDP (at purchaser's prices) * seasonally and calendar effects adjusted data December 217 2

3 has, for the thidr quarter since the revision of the data series, been performing better than it did in the last quarter before the outbreak of the crisis. Indeed, according to the third quarter s statistics, construction s gross value added exceeded that of Q2 28 by as much as 16. (by more than the other economic sectors). The structure of growth from the aspect of expenditure As to the expenditure side of GDP, final consumption increased by 4. after the first and the second quarter s 1. and 2. between July and September year-on-year. A more detailed analysis of consumption reveals changes in the same direction in the various components: as a consequence of the low inflation, growing employment and optimistic consumer expectations actual household consumption and public consumption increased by 4. and 2., respectively. The gross fixed capital formation increased by a record high rate of +26.1% yearon-year during the first quarter, which was also followed by a high growth rate of +2. in the second quarter of the year. With last year s basis continuing to be supportive during the remaining part of the year, an upswing in corporate investment, expanding community funds and corporate lending are boosting the increase in gross fixed capital formation. The export and import of goods and services grew by 4. and 9. yearon-year. The growth of export of goods slowed down, and that of imports accelerated, while in the wake of an increase in consumption and the dynamic growth of investments, the import of goods and services both grew at an increasing rate in Q3 (Chat 5). On the expenditure side, economic growth was powered primarily, during each of the first nine months of this year, by the gross fixed capital formation, which added 4.3 percentage points to the growth of GDP between July and September. Household consumption accounted for 2.7 % of the overall economic growth after a period of dynamic growth, for the first time since 26. Public consumption made a. contribution to economic growth, bringing the total contribution of final consumption to nearly 3. percentage points. The balance of the trade of goods and services, however, continued to be positive and foreign trade continues to drive the process of catching up through other channels (e.g. employment, industrial orders, technology import etc.). However, since import grew faster than export, the resulting net export continued just like in the first two quarters of this year to have a negative impact on the overall economic growth, slowing it down by 3.2 percentage points. This however, is a natural result of the dynamic of consumption and the import input requirements of investments. Indeed, the completion of investment projects and the resulting expansion of productive capacities are expected to give yet another impetus to the growth of exports (Chart 6). percentage point 7,5 5, 2,5, -2,5-5, -7,5-1, -12, Chart 5: Contribution to the Hungarian GDP (expenditure approach, y/y) Final consumption (LHS) Net export (LHS) Chart 6: The final use of GDP* (Q2 28 = 1) * seasonally and calendar effects adjusted data Q2 28 Q4 29 Q2 211 Actual final consumption of households Actual final consumption of government Gross fixed capital formation Export Import GDP, total 7, 5, 2,, -2, -5, -7, -1, -12, Gross capital formation (LHS) GDP growth (RHS) Economic growth in other countries of the Central and Eastern European region Data adjusted for seasonal and calendar effects show that with its 4.1% GDP growth rate Hungary s economy outperformed the eurozone for which a 2. rate has been calculated in regard to the ; accordingly, the economy of Hungary continued to converge to the average of the eurozone in terms of its per-capita GDP Chart (Chart 7). Hungary s yearon-year growth rate was the eighth highest, while the quarteron-quarter growth rate Chart puts Hungary to the 6th position, percentage points Chart 7: GDP growth in Hungary and in the eurozone (y/y) 5 1 * seasonally and working day effects adjusted data Sources: Eurostat, MFB -4 Q Q Q Q Q1 2 Q1 21 Q1 22 Q1 23 Q1 24 Q1 25 Q1 26 Q1 27 Differences in growth rates (LHS) Eurozone (RHS) Hungary (RHS) December 217 3

4 shared with two other member states in the ranking order of the EU countries (Chart 8). The respective structures of economic growth in the Central and Eastern European (CEE) EU member states continue to show similar features, shedding a light on domestic economic processes from an international perspective. Firstly, economic growth in this region continued to be pulled in part by household consumption, which increased typically by about year-on-year during the third quarter of 217 indeed, in Romania it grew by as much as 13.. Dynamic consumption is also supported by optimistic expectations, the increasing activity in the labour market, relatively low inflation and decreasing lending rates (Chart 9). Secondly, last year s decrease in investments has already been replaced by an upward trend by this year, due to another upswing in the disbursements of EU funds that followed the opening of the budget period. Between July and September, Hungary recorded an over 2 rate as regards the gross fixed capital formation; the corresponding ratios were in the 5-1 range in the Czech Republic, Slovakia, Slovenia and Romania, and it was 2.7% in Poland. But for those of the Slovenian and the Hungarian economy, the rates of the gross fixed capital formation were higher in the third quarter than in the second (Chart 1). Thirdly, export growth rates in the region generally converged: except for the 12.9% year-on-year growth rate recorded in Slovenia, the range of the year-on-year rates of growth of the exports of goods and services narrowed down to 4 in the third quarter (Chart 11). 9% 7% 1% -1% Chart 9: The household consumption in some CEE countries (y/y)* Chart 8: GDP growth in * in the European Union Romania Malta Latvia Poland Czech Rep. Slovenia Estonia Hungary Bulgaria Austria Slovakia* Lithuania Netherlands Croatia Spain Finland Sweden Germany European Union Euro area Portugal France Belgium Italy UK Denmark Greece Sources: Eurostat, MFB * seasonally and working day effects adjusted data ** seasonally adjusted data * seasonally and calendar effects adjusted data ** seasonally adjusted data Year/year Quarter/quarter Czech Republic Hungary Poland Romania Slovenia Slovakia** Sources: Eurostat, MFB Chart 1: The gross fixed capital formation in some CEE countries (y/y)* Chart 11: Export of goods and services in some CEE countries (y/y)* 2 Czech Republic Hungary * seasonally and working day effects adjusted data ** seasonally adjusted data Czech Republic Hungary 1 Poland 1 Poland * seasonally and working day effects adjusted data ** seasonally adjusted data Romania Slovenia Slovakia** Sources: Eurostat, MFB - Romania Slovenia Slovakia** Sources: Eurostat, MFB 4 December 217

5 Foreign trade, balance of payment In the third quarter, foreign trade was characterized by dynamic turnover and a positive balance Between July and September 217, Hungary s export and import increased by 4. and 7., year-on-year, up by a less dynamic 4. and a more dynamic 6. on a quarter-on-quarter basis. The growth of GDP (+3.9%, raw data), continued to be driven primarily by domestic consumption which added 7.1 percentage points to growth, while net export kept it back by 3.2 percentage points (Chart 1). In terms of the foreign trade product structure on one side, the export of fuels grew most dynamically (+35.), while on the other side the import of all product types grew by 7-9%, with the exception of raw materials, during the third quarter, year-on-year (Charts 2). Although the foreign trade surplus amounted to a mere HUF billion in, due to the massive foreign trade surplus accumulated during the preceding period, Hungary still has a foreign trade surplus. The export capacities currently being put in place may slow down, or even reverse the decrease of the foreign trade surplus (Charts 3-4). The current account balance was positive at the end of the third quarter as well; the surplus (of HUF billion) recorded between July and September was a result, like in earlier quarters, of the positive balance (of HUF 678. billion) in the trade of goods and services. The financial account shows that the economy of Hungary continues to have a net financing capability vis-a-vis foreign countries (Charts 5-6). percentage point Chart 1: Contribution of net export and domestic use to the Hungarian GDP growth (y/y) Net export (LHS) Domestic use (LHS) GDP growth (RHS) Food, beverages, tobacco Machinery and transport equipment Export Import Chart 2: Main commodity groups of external trade (, y/y) Fuels, electric energy Crude materials Manufactured goods 2.7% Total 7. Sources: HCSO, MFB Chart 3: The trade balance by commodity groups () Q2 212 Machinery and transport equipment Crude materials Manufactured goods Food, beverages, tobacco Fuels, electric energy Total Chart 4: The trade balance by markets () Q2 212 Other countries America Asia New EU members EU 15 Chart 5: Monthly changes in the Hungarian current account Chart 6: Monthly changes in the Hungarian financial account Goods and services Primary income Secondary income Current account NBH Other MFIs General government Other sectors Net external financing capacity December 217 5

6 Investments The dynamic of investments was at a historic high during the first three quarters Investments continued to expand at an outstanding rate in as well; the volume of investments and that of the gross fixed capital formation were up 18.3 and 2. (y/y) Consequently, investments grew by 22. between January and September year-on-year, a rate never registered before (Chart 1). Consequently, the ratio of the gross fixed capital formation to GDP (based on the last four quarters average) exceeded the region s average for the first time since 25 (Chart 2). The dynamic of developments was supported by a 64.6 and a 18. rate of growth in investment in the budgetary institutions and the business sector, respectively (Chart 3). In addition to the previous year s low basis, the key factors contributing to the considerable increase in activities included, among others, an increase in projects financed by funds from the EU budget cycle and investments in the private sector, in line with the global economic growth trend (Chart 4). With the exception of water management and waste management, all segments of the national economy were affected by the increase in investments; the all-important manufacturing sector produced a 14. growth y/y during Q3 (Chart 5). Further development projects are expected to take place during the coming months in view of the increase in public investment projects, the EU funds to be made accessible during the period, the prospering housing and office construction market, and the rates of utilisation of capacities (Chart 6). Chart 1: Gross fixed capital formation and GDP growth (y/y) Chart 2: The gross fixed capital formation to GDP ratio* in Central Eastern Europe % % 2 19% 1 17% Sources: Eurostat, HCSO, MFB * 4-quarter rolling average 2 27% % 2 19% 1 17% Q Q Q Q Q4 2 Q4 23 Q4 22 Q4 23 Q4 24 Q4 25 Q4 26 Q4 27 Q4 28 Q4 29 Q4 21 Q4 211 Gross fixed capital formation GDP (LHS) Hungary Czech Republic Poland Slovakia Romania Chart 3: Investment activity in the public and business sector in Hungary * corporations with more than 49 employees Q1 2 Q3 2 Q1 21 Q3 21 Q1 22 Q3 22 Q1 23 Q3 23 Q1 24 Q3 24 Q1 25 Q3 25 Q1 26 Q3 26 Q1 27 Q3 27 Business sector* (y/y) Budgetary institutions (y/y) Chart 4: EU transfers, corporate loan transactions and gross fixed capital formation* * 4-quarter rolling average ** at average prices of previous year Sources: HCSO, NBH, MFB Q4 24 Q2 25 Q4 25 Q2 26 Q4 26 Q2 27 Q4 27 Q2 28 Q4 28 Q2 29 Q4 29 Q2 21 Q4 21 Q2 211 Q4 211 Q2 212 EU transfers (LHS) Corporate loan transactions (LHS) Corporate loan transactions and EU transfers (LHS) Gross fixed capital formation** (RHS) Chart 5: Investment volume (y/y) in the main sectors Chart 6: Capacity utilization in manufacturing Education Construction sector Real estate activities Wholesale and retail trade Manufacturing Transportation, storage ICT sector Electricity, gaz, steam Agriculture TOTAL Of which: Machines, vehicles Of which: Construction December Sources: Eurostat, MFB Hungary Czech Republic Poland Romania Slovakia

7 Industry and construction Domestic demand driving growth in industry and construction this year The gross value added by industry and construction in increased by 3.7% and 28. year-on-year, as a consequence of which the two sectors contributed.8 and 1. percentage points, respectively, to the growth of GDP (Chart 1). The latest detailed data (of September) indicate an increase in the output of the majority of the segments of the manufacturing sector, with the highest growth rate recorded in the output of the pharmaceutical industry. Q4 217 made a promising start in industry: the volume of the output in October increased by 7. y/y and 1. m/m according to preliminary data (Chart 2-3). Data collected in MFB s recently closed 217 Autumn survey (MFB-INDICATOR) show that growth in foreign trade this year has benefited the vehicle industry, engineering, the chemical industry and the manufacturing of rubber and plastics most, while the benefits of the upswing in domestic trade were enjoyed primarily by the vehicle industry and construction (Chart 4). The latter was made possible by an increase, due to the growing household purchasing power, in the demand for durable consumer goods and housing, the latter of which was even encouraged by EU funds made available and a variety of governmental development programmes. The output of the construction sector continued to grow dynamically in September (+27. y/y) even after the record high growth rates observed in preceding months. Continued dynamic growth in the sector is indicated by a record high number of new building permits issued (Charts 5-6). percentage point -1, , 2,5, -2,5-5, -7,5 Chart 1: GDP growth and contribution of industry and construction sector to GDP growth (y/y) Industry (LHS) Construction (LHS) GDP (RHS) Chart 3: Industrial production* in Hungary Month/month (RHS) *seasonally and calendar effects adjusted data Year/year (LHS) Chart 2: Production* of the manufacturing sub-sectors (September 217) Manuf. of pharmaceuticals Computer, electronic prod. Metal prod. Textiles, leather prod. Electrical equipments Rubber and plastic prod. Manuf. of machinery Wood and paper prod. Chemical prod. Food, beverages, tobacco Transport equipment MANUFACTURING TOTAL % 14.9% 13.7% 11.7% % *same period of last year = 1, seasonally and calendar effects adjusted data 1 Chart 4: Foreign and domestic market turnover changes during the past 12 months in manufacturing and construction by the companies' views 7 1. Food, beverages, 1 12 tobacco 6 2. Textiles, leather 6 5 production 5 3. Wood products Chemical indutry Rubber and plastic 1 3 production 7 6. Manuf. of 2 8 pharmaceuticals Metal manuf Computer, 4 electronic production 9. Electricak Sources: MFB INDCATOR -1 machinery production corporate surveys, autumn Manufacture of -2 machinery Furniture indutry Domestic market 12. Transport equipment 13. Construction Foreign marker 1 * the difference between the percentage of the companies experiencing growth or decline Chart 5: Construction production and orders (y/y) Chart 6: Issued new construction permits Stock of orders at the end of the month (LHS) New orders (LHS) Construction output (RHS) December m Q2 212 Floor space of non-resindential buildings (LHS) Floor space of resindential buildings (LHS) Number of resindential buildings (RHS) Number of non-resindential buildings (RHS)

8 Services The tertiary sector maintained its outstanding role among the key components of economic growth The gross value added by the services sector in increased by 3. (y/y), as a consequence of which the sector contributed 2. percentage points, respectively, to the growth of GDP. Significant contributions to the growth of GDP were made within the tertiary sector particularly by segments such as the repair of motor vehicles and catering (+.7 percentage point), as well as professional, technical and scientific activities, between July and September 217. With the exception of public administration, education and human health services, the segments of the tertiary sector expanded in ; the most dynamic growth was observed again in professional, technical and scientific activities, and in information and communication (8.1 and 8., y/y respectively). With the exception of education, the majority of businesses in the various segments of the services sector have experienced growth in domestic turnover during this year according to MFB s recently closed 217 Autumn corporate survey (MFB-INDICATOR). A particularly high proportion of respondents reported of growth in turnover among businesses engaged in the real estate business, relying on the upswing in the construction sector (Chart 1-4). The performance of freight transport, in terms of freight ton-kilometres, increased by 3. y/y during, with outstanding year-on-year growth rates particularly in transport by pipeline and water (+43.3 and +11., respectively). International and domestic forwarding also expanded in comparison to the corresponding period of the previous year (+3.1 and +4., respectively) (Chart 5). While the number of nights spent at commercial accommodations was 13.1% up between April and June (y/y,) between July and September it was already 2.9% higher than one year before (Chart 6). percentage point 5, 2,5, -2,5-5, -7,5-1, Chart 1: GDP growth and contribution of services to GDP growth (y/y) Services (LHS) GDP (RHS) Chart 3: Production of the services sub-sectors (y/y) percentage point Chart 2: GDP growth and contribution of services sub-sectors to GDP growth (y/y) 3, 2, 1,, -1, -2, -3, Arts and entertainment Professional, scientific act. Financial and insurance act. Transportation and storage Services, total Public admin., education, health care Real estate act. Information and communication Trade; repair of vehicles, tourism Chart 4: Domestic market turnover changes during the past 12 months in services sub-sectors by the companies' views Services, total Trade, repair of vehicles, tourism Transportation and storage Information and communication Financial and insurance act. Real estate act. Professional, scientific and technical act. Public admin., education, human health care Arts, entertainment Real estate activities Accomodation, food serv. Transportation and storage Art, entertainment Wolesale, retail trade Repair maintenance Human health act. ICT Services supporting act. Professional, scientific act. Increased Did not changed Decreased Difference (RHS) * the difference between the percentage of the companies experiencing growth and decline Education percentage point Sources: MFB INDCATOR corporate survays, autumn 217 Chart 5: The transport of goods breakdown by territory and the way of carriage Chart 6: Tourism nights in April - July, and in July - September freight ton-kilometers Transport by pipeline Waterway transport Road transport Rail transport National International Total December ,7% 47,7% 47, 52,9% 52, 46, 47, 5, 52, 51,9% International tourism nights (LHS) Domestic tourism nights (LHS) Proportion of domestic tourism nights (RHS) Sources: HCSO, MFB

9 Consumption The dynamic growth recorded in September in retail trade continued in October The month of November saw continued though modest increase in consumer confidence in Hungary. Consumer sentiment improved in general in all of the countries of the CEE region with the exception of Romania (Chart 1). According to preliminary data adjusted for calendar effect the annual growth rate of the retail turnover accelerated to 6. in October, a record high rate since June 216. The over dynamic that has been observed for the second month in a row was enabled by factors including optimistic household expectations (the proportion of respondents expecting major expenditures and savings, while concerns about inflation and unemployment remained near the record low level) and last year s low basis. The increase in consumption involved a wide range of products: the greatest increase was recorded in the sales of other products (+9.7%), followed by fuels (+7.1%) and foodstuffs (+3.1%) (Charts 2-4). The increase in consumption was supported by positive changes in employment and earnings, as well as trends in lending: with the exception of any-purpose loans, loan portfolios increased in all segments during October, therefore, the total portfolio of retail loans was 1.1% up year-on-year (Chart 5). Households financial assets increased by a record high HUF 132. billion during the month of October (in the wake of transactions calculated with a 12-month rolling average) (Chart 6). point Chart 1: Consumer confidence* in Central and Eastern Europe * seasonally adjusted data Sources: European Commission, MFB Poland Czech Republic Slovakia Hungary Romania Chart 2: Retail trade volume* in Hungary Month/month (LHS) Year/Year (RHS) - * seasonally adjusted and adjusted data by working days Chart 3: Expectations* regarding savings, major purchases, unemployment rate and prices in Hungary Chart 4: Retail trade by the main product groups (y/y) (volume index adjusted for calendar effects) point expectations of rising, increasing * expectations regarding over the next 12 months Sources: European Commission, MFB Savings Unemployment rate Major purchases Prices 1 9% % * adjusted for calendar effects Non-food products Food products Fuels 1 9% % Chart 5: Loans to households (y/y) Chart 6: Households' financial assets (by transactions) Personal loans Car purchase loans Consumer and other loans Housing loans Mortgage loans for consumption purpose Total loans *government and other securities; ** 12-month rolling average Domestic quoted shares Domestic debt securities* Cash (foreign currency) Total financing assets** (RHS) Domestic investment fund shares Domestic bank deposit Cash (HUF denominated) December 217 9

10 Labour market Unbroken increase in wages continued in October The activity rate and the employment rate increased between August and October 217 to 62.1% and 59.7%, up.5 and 1. percentage points, year-on-year. During the same period the rate of unemployment dropped to 4., down.8 percentage point than one year before (Chart 1). Household expectations indicate continued improvement in employment, which is confirmed by the European Commission s projection as well, according to which the average unemployment rate will drop to 4. in 217 and further down to 4. in 218, from last year s 5.1% (Chart 2-3). The 1. year-on-year increase in the number of employees was pulled by a 2. increase in the private sector, while the number of people employed in the public sector dropped by 4.1%. The total number of public employees dropped to 157,1, down 2.1% month-on-month and 23. year-on-year. The dynamic growth of wages continued: like in earlier months, the most significant rates of increase were recorded in the segments where the number of employees decreased, i.e. where the scarcity of labour increased (Charts 4-5). Labour costs in the manufacturing industry increased faster in the countries of the Central and Eastern European region than the average rate of increase recorded in the eurozone, while the dynamic observed in Hungary exceeded even the rates recorded in the neighbouring countries (Chart 6) Chart 1: Activity rate, employment rate and unemployment rate in Hungary (population aged 15-74) Unemployment rate (LHS) Activity rate (RHS) Employment rate (RHS) point Chart 2: Unemployment rate and households' expectations regarding unemployment rate over the next 12 months * population aged improving expectations Expectations regarding unemployment (LHS) Sources: European Commission, HCSO, MFB 1 11% 1 9% 7% Unemployment rate (RHS) Chart 3: Forecasts regarding unemployment rate* in Hungary 1 Sources: HCSO, European Commission, MFB 11% * population aged % 7% Unemployment rate Forecast of the European Commission (November 217) Chart 5: Number of fostered workers in Hungary Changes in gross wages Chart 4: Changes in number of employed persons and gross wages (September 217, same period of the previous year = 1) Agriculture 2 - Industry Construction 4 - Wholesale &retail trade Transportation, storage 6 - Accomodation, food service act ICT Financial intermediation trend line Real estate activities Administrative & 7 support service act Public administration 12 - Education Health care 14 - Social work activities Business sector Budgetary institutions Changes in number of employed persons 17 - TOTAL Chart 6: Labour cost index in manufacturing* (212 = 1, nominal value) thousand people * seasonally adjusted and adjusted data by working days; compensation of employees plus taxes minus subsidies Eurozone Czech Republic Hungary Poland Romania Slovakia Sources: Eurostat, MFB Number of fostered workers (LHS) Changes in number of fostered workers (y/y, RHS) Q2 212 December 217 1

11 Inflation The annual increase in consumer prices remained below the target inflation rate The prices of crude oil and the most important industrial and agricultural raw material prices equally increased during the month of November. The Brent grew 3. more expensive in one month, partly as a result of the fact that at the end of November the Organization of the Petroleum Exporting Countries (OPEC) adopted an agreement on continuing the restriction of production (at the end of the month the listed price of a barrel of Brent was 63.5 USD) (Chart 1). The acceleration of the increase in producer prices continued in Hungary: by 5. in agriculture in September and by 4. in industry in October, year-on-year (Chart 2). Consumer prices were up 2. in November year-on-year, while the 12-month core inflation rate dropped to 2.. Foodstuffs, market services as well as alcoholic beverages, tobacco and fuels products contributed similar.5-.6 percentage point rates to the annual inflation rate (Charts 3-4). The continued modest consumer price increase expectations are among the factors keeping inflation low (Chart 5). The consumer basket grew. more expensive month-on-month. Of the main product categories, the prices of other products increased at the highest (+1.7%) rate as a consequence of a 3. increase in fuel prices, while prices dropped again in the segment of services and the category of durable consumer goods (Chart 6). Chart 1: Commodity price indices and world crude oil price Chart 2: Producer price index of industry and agriculture, export price index and import price index in Hungary (y/y) Sources: Reuters, MFB CRB commodity price index (LHS) Brent Crude Oil (RHS) CRB foodstuff price index (LHS) $/barrel Producer price index of agricultural products Producer price index of industry Import price index Export price index 1 - Chart 3: Core inflation, monthly and annual changes of consumer price index in Hungary Sources: HCSO, NBH, MFB , 2, 1, 1,,, -, -1, CPI (m/m, RHS) CPI (y/y, LHS) Core inflation (y/y, LHS) Chart 5: Consumer price index and consumer expectation regarding inflation 7% 1% -1% - - Chart 4: CPI by the main groups of goods and services Foods Market services Alcohol, tobacco Regulated goods & services Industrial products Market energy Fuel CPI Chart 6: Changes of consumer prices by the main groups of products and services (November 217, m/m) 7% 1% -1% Sources: European Commission, NBH, MFB rising expectation regarding inflation over the next 12 months 1 1 Other goods, including motor fuels Clothing and footwear Alcoholic beverages, tobacco. 1.7% 1. point Food Fuel and power Inflation expectations (LHS) Consumer price index (y/y, RHS) - Consumer durable goods Services Total -. -., ,,, 1, 1, 2, December

12 Banking sector Domestic financial institutions reported stable returns on assets and equity in Q3 as well The balance sheet total of Hungarian banks increased to an amount in which was a new record since 29 Q1, after a 1. quarter-on-quarter and a 7. year-on-year increase. The net credit portfolio expanded by 1.7% quarter-on-quarter, in which the rates of growth in the corporate and the retail segments were 4. and 1.7%, respectively. The portfolio of customer deposit increased by 2.9% in a quarter, bringing down the loans-to-deposit ratio from 94.1% to 93. (Charts 1-2). The ratio of non-performing loans (NPL) dropped from 4. in June 217 to 4.1 by September. The corresponding ratio decreased among corporate customers from 4. to 3.8 in three months, while the retail NPL dropped from 9. to 8.5 (Chart 3). Credit institutions profit before and after taxes amounted to a total of HUF billion and HUF billion, respectively, in the third quarter of 217. The interest profit (HUF billion) was similar to the previous year s Chart, while the profit from commissions (HUF 13.7 billion) and the amount of operating costs (HUF 27.9 billion) increased by 13.1% and 2.9%, respectively (year-on-year). The ROA and ROE after taxes, calculated on the basis of quarterly rolling data increased to 1. and 13.1%, respectively, driven by reversal of specific provisions in amounts never recorded before (Charts 4-5). The equity position of the banking sector is still stronger than the regional average, while the capital adequacy ratio rose from 21. to 21. in three months (Chart 6). HUF thousand billion Chart 1: Balance sheet total, total loans and total deposits of credit institutions Corporate loans* Household loans* Loans* Client deposits Total assets * net value Chart 2: Loan-to-deposit ratio (LTD ratio) of credit institutions (December 26 - Június 217) Total Corporate sector Household sector Chart 3: Proportion of non-perfoming loans* Chart 4: Main items of the income statement of credit institutions * total amount of loans overdue over 9-days / total loans Total loans Household loans Corporate loans Loans of local governments Extraordinary profit Operating expenditures Net commissions and fees Provisions Other non-interest type profit Net intereset income Chart 5: ROA* and ROE* in the banking sector 2 ROE - 4-quarter rolling average (LHS) ROA - 4-quarter rolling average (RHS) * after tax - -2 Q4 27 Q2 28 Q4 28 Q2 29 Q4 29 Q2 21 Q4 21 Q2 211 Q4 211 Q , 1, 1,,, -, -1, -1, -2, 2 21% 2 19% 1 17% Chart 6: Capital adequacy ratio of the banking sector in some Central Eastern European countries Sources: NBH, KNF, CNB, NBS, BNRO, MFB % 2 19% 1 17% Hungary Poland Czech Republic Slovakia Romania December

13 Corporate funding A year of unbroken increase in the portfolio of corporate loans The corporate loan portfolio continued to expand: During October 217, the loan portfolio increased with the effects of exchange rate changes taken into account by HUF 49.4 billion (+.). In terms of tenors, the greatest increase was observed in the portfolio of long term (more than 5-year) loans (+ HUF 53.3 billion), their proportion increased to a record high of 45. in the total portfolio (Charts 1-2). The dynamic of domestic corporate lending increased to equal the average of the Visegrád countries during the summer months (Chart 3). The portfolio of HUF loans increased by HUF 71. billion in the wake of transactions (as the balance disbursements and repayments), while that of foreign exchange loans dropped by the equivalent of HUF 21.9 billion in October, resulting in a 49.1 billion aggregate increase, essentially in line with the first 9 months average (Chart 4). No significant change occurred in corporate HUF lending rates either: the average lending rate on 1-5 year loans decreased from 2.7 to 2.6 in one month, while the average lending rate on longer term loans remained unchanged at 2.7 (Chart 5). Long term lending rates in Hungary are relatively low by regional standards, comparable to those prevailing in the Czech Republic (Chart 6). Chart 1: Total amount of loans by counterparties Chart 2: Total amount of corporate loans by maturity structure over 5 years Non-financial corporations Households years - 1 year Proportion of loans over 5 years (RHS) Chart 3: Change in total amount of outstanding non-financial corporate loans through loan transactions Chart 4: Change in total amount of outstanding non-financial corporate loans (y/y)* HUF loans FX loans Total loans * change in total value converted to euro Sources: Eurostat, MFB Hungary Czech Republic Slovakia Poland Romania Chart 5: Interbank interest rates*, and interest rates on corporate loans** Chart 6: Interest rates on corporate loans* in Central and Eastern European countries Sources: ECB, NBH, MFB * 3-month interbank rates ** annualised interest rates weighted by month-end values BUBOR EURIBOR HUF loans - over 5 years HUF loans years EUR loans in Hungary - over 5 years EUR loans in Hungary years 9% 7% 1% Sources: ECB, NBH, MFB * annualised interest rates over 5 year maturity, weighted by month-end values, in national currency 9% 7% 1% Eurozone Hungary Czech Republic Poland Slovakia Romania Bulgaria December

14 Exchange rates The HUF remained stable against the EUR in November In November, the HUF lost. against the EUR, against the USD and the CHF it gained 1. and., respectively (monthend listing prices: HUF/EUR, 264. HUF/USD, and HUF/CHF). A short-lived negative trend in the international investment climate observed in mid-november was reflected by the HUF/EUR rate as well (in a weakening of the HUF), however, the HUF/EUR rate has practically constantly been in the range for a year and a half now (Charts 1-2). The rates of the Central and Eastern European currencies against the euro have been changing in both directions during November: besides the HUF, the RON also lost 1%, while the CZK and the PLN gained.7% and 1.1%, respectively (Chart 3). Of the region s currencies it was the RON/EUR rate with which the HUF/EUR rate was most closely coordinated. The HUF rate is essentially positively affected by continued favourable real economic expectations (it was in Hungary among the countries of the Central and East European region that economic participants were the most optimistic, according to the Eurostat sentiment index in November as well after the preceding month Chart 4), positive current account and the capital balances, years of strict fiscal policies in Hungary and the positive investors perceptions concerning Hungarian assets: the BUX closed at a new all-time high in early November (4 274 points) and the reference rate on the 1-year government bonds had dropped to an all-time low of 2.4 (Charts 5-6). Chart 1: The HUF/EUR exchange rate and the global risk appetite Chart 2: The exchange rate of the forint against the Swiss franc, the US dollar and the euro Sources: CBOE, ECB, MFB increasing global risk appetite HUF/EUR (LHS) VIX index (RHS) point forint strengthening HUF/EUR HUF/USD HUF/CHF Sources: ECB, MFB Chart 3: The exchange rates of Central and Eastern European currencies against the euro* Chart 4: The HUF/EUR exchange rate and the Economic Sentiment Index (ESI) in Hungary 11, 11, 1, 1, 99, 99, 98, Sources: ECB, MFB strengthening against the euro * = , 11, 1, 1, 99, 99, 98, Czech koruna Hungarian forint Romanian leu Polish zloty HUF/EUR (monthly average, LHS) ESI (RHS) Sources: ECB, European Commission, MFB improving sentiment inverted scale Chart 5: The HUF/EUR exchange rate and the Budapest Stock Exchange index Chart 6: The HUF/EUR exchange rate and 1-year bond yield Sources: ECB, Reuters, MFB rising BUX index forint HUF/EUR (LHS) strengthening BUX index (inverted scale, RHS) point, inverted scale , 4, 3, 3, 3, 3, 3, 2, 2, Sources: Government Debt Management Agency, Reuters, MFB 2, HUF/EUR (LHS) 1-year government bond yield (RHS) December