F o c u s. The economic growth in Hungary in Q1 2015

Transcription

1 Hungarian Development Bank s monthly report F o c u s The economic growth in Hungary in Q1 215 The first three months of the year saw the continuation of growth convergence between developed and developing countries. EU growth was propelled by the Central and Eastern European region, with a significant contribution by Hungary s GDP figure. The main driving force behind the Hungarian economy s year-on-year growth was export, consumption further intensified, while GDP growth was held back by gross capital formation. On the production side, surpassing the service sector, industry made the highest contribution to economic growth between January and March. June 215 The global economy continued to expand moderately in Q1 215, but the performance of regions and countries was uneven. Although the world economy is still propelled by emerging countries, the growth rate of these countries has been decreasing since 21. They lost further momentum in the first months of 215, while the growth of developed economies was more dynamic in the period after 212 than in the previous years, which trend continued in Q The developing world s share of global GDP keeps rising, albeit at a slower pace than in the past years (25: 47., 21: 53., 215: 57.). According to the International Monetary Fund s (IMF) April forecast, the gap between the growth rates of developed and developing countries will narrow further this year (Chart 1) Chart 1: GDP growth in developed and emerging economies and the share of developed countries in the global GDP * 216* 217* 218* 219* 22* Growth rate of advanced economies (y/y, RHS) Growth rate of emerging economies (y/y, RHS) Share of developed countries in the global GDP (LHS) Economic growth remained steady in the US in Q1 215, with GDP increasing by 3. as compared to the first three months of 214. This was mainly due to intensified consumption, improved labour market and housing market conditions, as well as low energy prices. However, annualised on a quarterly basis, the output of the US economy decreased (-.7%) as a result of the particularly cold winter and the appreciation of the dollar. (continued on page 2) Sources: IMF, MFB Content Net exports were the driver of economic growth regarding expenditure approach in Q (Page 4) Investments may be close to stagnation for the remainder of the year... (Page 5) The industrial outlook is promising, while construction may lose momentum in the months to come... (Page 6) Consumption became one of the drivers of economic growth... (Page 7) Employment growth is gradually reaching its upper limits... (Page 8) Consumer prices increased both on an annual and monthly basis after a period of ten months... (Page 9) The situation and prospects of the financial intermediary system are better than one year before... (Page 1) Despite falling interest rates on loans, the amount of corporate loans declined further in April... (Page 11) The Hungarian currency s weakening in May was primarily due to country specific factors... (Page 12) This year s budget figures are developing as planned... (Page 13) Authors: Zsolt Szabó (Szabo.Zsolt@mfb.hu) Nóra Cser 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 Eurozone growth remained relatively slow by international standards, but it slowly picked up in late 214 thanks to the expansion of external and internal demand coupled with low energy prices and inflation. In the first three months of 215, the growth rate was 1. y/y and. as compared to Q The performance of Germany an economic centre of particular relevance to the Hungarian economy was similar to that of the Eurozone, with a growth rate of 1. y/y in Q1 215, while GDP rose by.7% in France and. in Italy. In the latter country, this marked the end of a period of recession which lasted thirteen quarters, while GDP has been falling over two or three consecutive quarters in other Eurozone Member states, namely Greece and Finland, respectively. The Japanese economy has recovered gradually since the second half of 214, expanding at a rate of 2. on a quarterly basis in the first three months of 215 due to cheap energy sources, the weak Japanese yen and the loose monetary policy. However, as compared to Q1 214, a decline of 1. occurred, mainly as a result of a VAT hike last April which had a moderating effect on consumption. In Asian developing countries, and particularly in China, economic growth is slowing down. Nevertheless, this region still represents the growth centre of the global economy, and produced 29. of world GDP in 214. In the last nine months, China showed decelerating GDP growth on a quarterly basis (Q3 214: 1.9%; Q4 214: 1.; Q1 215: 1.), while the Chinese economy grew by a mere 7. as compared to the same period of 214 (Chart 2). In the EU, Central and Eastern European countries were the best performing member states in Q1 215, with output growing at rates above y/y in the four Visegrád countries and Romania alike. GDP rose at the highest rate in the Czech Republic and Romania (equally 4.) and by 3. in Poland, 3. in Hungary and 3. in Slovakia. The keys to expansion included improving external and internal demand, as well as rising consumption expenditure. Regarding the structure of GDP in the Czech Republic, Poland, Hungary and Romania, the first country recorded the highest rate of gross fixed capital formation for Q1 215 in the region. Poland stood out in terms of final consumption expenditure thanks to its relatively wide internal market. In Hungary, net exports had a relatively high share in GDP production, which was due among other things to the quite weak performance of the Hungarian currency in Q1. Romania had a prominent import surplus between January and March (Chart 3). According to seasonally and calendar adjusted, balanced data, the Hungarian economy expanded by. on a quarterly basis and 3. y/y between January and March (on the basis of unadjusted raw data, the growth rate was 3.). The adjusted data are equal to the rate achieved in the period one quarter before, suggesting that the relatively dynamic growth continued (Chart 4). Chart 2: GDP growth in certain areas of the global economy (y/y) 1 9% 7% Sources: Reuters, MFB Q1 211 Q2 211 Q3 211 Q4 211 Q1 212 Q2 212 Q3 212 Q4 212 Q1 213 Q2 213 Q3 213 Q4 213 Q1 214 Q2 214 Q3 214 Q4 214 Q1 215 China Eurozone Japan USA Chart 3: Share of GDP components in gross domestic product in CEE countries in Q % % 69.9% 74.9% 1 9% 7% Czech Republic Poland Hungary Romania Net export Gross fixed capital formation Final consumption expenditure Chart 4: GDP growth* in Hungary Sources: Eurostat, MFB Q1 26 Q3 26 Q1 27 Q3 27 Q1 28 Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q1 213 Q3 213 Q1 214 Q3 214 Q1 215 Quarter/quarter (LHS) * seasonally adjusted data Year/year (RHS) Periscope June 215 2

3 Thanks to the dynamic GDP growth, the growth rate of the Hungarian economy was higher than that of the Eurozone for the ninth consecutive quarter. However, the gap is gradually narrowing as the Eurozone is picking up and the Hungarian economy is slowing down: the difference between the annual rates melted from 3. percentage points in Q2 214 to 2.3 percentage points in Q1 this year. Thus, while the Eurozone s recovery is stimulating the Hungarian economy through the strengthening external demand, convergence with the Eurozone is slowing down as a result of the diminishing difference in growth (Chart 5). With the Hungarian economy being on a growth path since early 213, Hungary s GDP reached its pre-crisis level (of Q2 28) in the first three months of this year, but the economic weights of the factors contributing to growth have changed significantly. Exports now exceed their volume of April-June 28 by 23., but household consumption and gross fixed capital formation are still behind their level before the outbreak of the crisis (-7. and -12.7%), and overall internal consumption is also 1. lower than its level of March-June 28 (Chart 6). On the production side, agricultural output was 11. lower than one year before. Industry and construction expanded by 7.7 and 9. (y/y), respectively, with the latter recording growth for the eighth quarter in a row, though the amount of new orders suggest that the performance of construction may decline for the remainder of the year. Within industry, considerable growth was achieved in the manufacturing sector, and more specifically in the automotive industry and the connecting branches. The service sector grew at a rate of 2., involving a 1. drop in the gross value added of financial, insurance activities, which have been in decline over a long period, and thus the financial intermediary system (which attempts to compensate falling revenues by cutting costs) indirectly impedes the performance of other sectors. Growth was set back by.3 percentage points by agriculture, while industry, construction and the service sector contributed to GDP growth by 1.8,.2 and 1.3 percentage points, respectively, suggesting that industry is increasingly becoming the engine of Hungarian economic growth on the production side (Chart 7). On the expenditure side, the actual consumption of households expanded by 2. thanks to low fuel prices, increasing employment and rising real wages, and exports and imports grew by 1.3 and 7., respectively, while gross capital formation shrank by 2.9%, involving a 6.7% drop in gross fixed capital formation due to the high base before the elections and the corporate sector s reduced mood for investment. Thus net exports and final consumption contributed to the GDP growth of 3. by 3. and 1.1 percentage points, respectively, while gross capital formation pushed it down by.5 percentage points. Internal consumption only expanded by. (y/y) and made a contribution of.6 percentage points to GDP growth in Q1 215, indicating partly the openness and vulnerability of the economy and partly the isolation of the export sector from other segments of the economy (Chart 8). percentage points percentage point percentage point , 2,5, -2,5-5, -7,5-1, -2,5-5, -7,5-1, -12,5 Chart 6: The Hungarian GDP and the main components (Q2 28 = 1*) Q2 28 * seasonally adjusted data, average prices of 25 Q4 28 Q2 29 Q4 29 Q2 21 Q4 21 Q2 211 Final consumption of households Domestic use GDP 7,5 5, 2,5, Chart 5: GDP growth in Hungary and in the Eurozone (y/y) * seasonally and working day effects adjusted data Q4 211 Q2 212 Q4 212 Q2 213 Q4 213 Q2 214 Q4 214 Gross fixed capital formation Export Chart 7: Contribution to GDP growth (production approach, y/y) Q1 28 Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q1 213 Q3 213 Q1 214 Q3 214 Q1 215 Chart 8: Contribution to the Hungarian GDP (expenditure approach, y/y) Q1 28 Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q1 213 Q3 213 Q1 214 Q3 214 Q1 215 Final consumption (LHS) Net export (LHS) Sources: Eurostat, MFB Q Q Q Q Q Q Q3 2 Q2 21 Q1 22 Q4 22 Q3 23 Q2 24 Q1 25 Q4 25 Q3 26 Q2 27 Q1 28 Q4 28 Q3 29 Q2 21 Q1 211 Q4 211 Q3 212 Q2 213 Q1 214 Q Differences in growth rates (LHS) Eurozone (RHS) Hungary (RHS) , 2,, -2, -5, -7, -1, Agriculture (LHS) Industry (LHS) Construction (LHS) Services (LHS) GDP (RHS) 7, 5, 2,, -2, -5, -7, -1, -12, Gross capital formation (LHS) GDP growth (RHS) Periscope June 215 3

4 Foreign trade, current account Net exports were the driver of economic growth regarding expenditure approach in Q1 215 Between January and March, Hungarian exports and imports expanded by 1. and 7. (y/y), respectively, while net exports made an overall contribution of 3. percentage points to economic growth, which has been unprecedented for the past five years (Chart 1). The trade balance of goods showed a record surplus in Q1 (HUF billion), mainly resulting from a surplus of HUF billion recorded in the product group of machinery and transport equipment. In this major product group, the increase in export exceeded import growth by 2.9 percentage points. By contrast, imports were more dynamic than exports in the case of manufactured goods and food, beverages and tobacco products due to intensified consumption (Charts 2-3). However, exports may lose momentum in the months ahead, because export orders declined significantly on a monthly basis in May, while they increased in Germany and the EU (Chart 4). Q1 215 was closed with a surplus on the current account. The amount of the surplus, which increased on a monthly basis, was attributable to a positive and improving trade balance of goods and services. On the financial account, the deteriorating balance of general government (HUF billion) could be offset by the improving balances of the central bank (HUF billion) and other sectors (corporates, households) (HUF billion) in March (Charts 5-6) Chart 1: Export growth and contribution of net export to GDP growth Q Q Q Q Q Q Q Q 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 Q1 28 Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q1 213 Q3 213 Q1 214 Q3 214 Q1 215 Contribution of net export to GDP growth (y/y, RHS) Export growth (y/y, LHS) Chart 3: Main commodiyt groups of external trade (Q1 215, y/y) percentage point Chart 2: Trade balance in Hungary (January - March) Chart 4: Export orders in the European Union, Germany and Hungary Machinery and transport equipment Manufactured goods 9.9% 1, Fuels, electric energy Crude materials 13.7% 3. Food, beverages, tobacco 6. Export Sources: Import HCSO, MFB point Sources: European Commission, MFB EU Hungary Germany point 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 Periscope June 215 4

5 Investments Investments may be close to stagnation for the remainder of the year The volume of investments decreased by 4. (y/y) between January and March, following an expansion of 1.9% in Q4 last year, while gross fixed capital formation (y/y) fell at a rate of 6.7% in Q1 this year, after growing by 1.9% between October and December 214 (Chart 1). Gross fixed capital formation as a percentage of GDP dipped to a record low level in the region, hitting a two-year low in the first three months of the year (14.7%) (Charts 1-2). Private sector investments and public investments were lower by.7% and 1., respectively, than a year before, with the high base of early 214 also playing a key role in the decline (Chart 3). Investments fell at a rate above 1 in the info-communication sector and education, and the electricity sector was the only one of the important sectors where investments expanded on an annual basis (Chart 4). The level of industrial capacity utilisation, which exceeds 8, and the expected development of orders may give an impulse to developments in the quarters to come, but the high base, the temporary scarcity of Community funds and the reduced investment appetite (MFB Periscope February 215) are expected to keep the dynamics of developments close to stagnation this year (Charts 5-6). 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 * 4-quarter rolling average Sources: Eurostat, HCSO, MFB Q Q Q Q Q Q Q3 2 Q2 21 Q1 22 Q4 22 Q3 23 Q2 24 Q1 25 Q4 25 Q3 26 Q2 27 Q1 28 Q4 28 Q3 29 Q2 21 Q1 211 Q4 211 Q3 212 Q2 213 Q1 214 Q Q2 24 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 Q4 212 Q2 213 Q4 213 Q2 214 Q Gross fixed capital formation GDP Hungary Czech Republic Poland Slovakia Romania Chart 3: Investment activity in the public and business sector in Hungary * corporations with more than 49 employees Sources: HCSO, MFB 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 Q1 28 Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q1 213 Q3 213 Q1 214 Q3 214 Q1 215 Business sector* (y/y) Budgetary institutions (y/y) Chart 4: Investment volume (y/y) in the main sectors Electricity, gaz, steam 14. Manufacturing. Real estate activities -. Wholesale and retail trade -4. Agriculture -7.9% Transportation, storage -8. Construction sector -8. ICT sector -1.9% Education -26. TOTAL -4, Of which: Construction -8.9% Of which: Machines, vehicles Q1 215 Q4 214 Chart 5: Capacity utilization in manufacturing Chart 6: New orders and gross fixed capital formation (y/y) 9 9 Sources: Eurostat, MFB Q1 28 Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q1 213 Q3 213 Q1 214 Q3 214 Q1 215 Hungary Czech Republic Poland Romania Slovakia proportion of companies expecting rise minus proportion of companies expecting drop (percentage point) * 4-quarter rolling average Q4 29 Q1 21 Q2 21 Q3 21 Q4 21 Q1 211 Q2 211 Q3 211 Q4 211 Q1 212 Q2 212 Q3 212 Q4 212 Q1 213 Q2 213 Q3 213 Q4 213 Q1 214 Q2 214 Q3 214 Q4 214 Q1 215 Q2 215 Consumer goods* (LHS) Investment goods* (LHS) Sources: European Commission, HCSO, MFB Intermediate goods* (LHS) Investments* (RHS) Periscope June 215 5

6 Industry and construction The industrial outlook is promising, while construction may lose momentum in the months to come The gross value added of industry and construction increased by 7.7% and 9. (y/y), respectively, in Q1 215, and thus the contribution of these two sectors to GDP growth reached 1.8 and.2 percentage points, respectively. The performance of the construction sector has an upward impact on growth for the eighth quarter in a row, while industry s contribution to growth is considered the highest over the last four years (Chart 1). In April 215, industrial production grew by 6. on an annual basis but contracted by. as compared to March (Chart 2). The automotive industry remained the driver of the manufacturing industry (+16.9%). In the rubber and plastic manufacturing also expanded at a rate above 1 (Chart 3). The slowdown in new domestic orders and the worsening German business expectations are expected to hold back the momentum of industrial production in the months to come, while the manufacturing industry may continue to expand at a rate between 5 and 1 in the same period (Charts 4-5). Although construction output grew at a rate of 12.7% in March and then 1. y/y in April (building construction and other constructions grew by 4. and 16., respectively), the amount of new orders and the total amount of orders was 1. and 38. lower, respectively, than one year before, casting a shadow on the outlook for the months ahead (Chart 6). Chart 1: GDP growth and contribution of manufacturing and construction sector to GDP growth (y/y) Chart 2: Industrial production* in Hungary 5, 2, percentage point, -2,5-5, -7,5-1, Q1 28 Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q1 213 Q3 213 Q1 214 Q3 214 Q1 215 Manufacturing Construction (LHS) GDP (RHS) Chart 3: Production* of the manufacturing sub-sectors (April 215) Month/month (RHS) *seasonally and calendar effects adjusted data Year/year (LHS) Chart 4: German business expectations (IFO index) and Hungarian manufacturing production Transport equipment 116.9% Rubber and plastic prod % Manuf. of pharmaceuticals 18. Electrical equipments 15. Computer, electronic prod. 13. Wood and paper prod. 12.7% Textiles, leather prod. 1. Food, beverages, tobacco 99. Metal prod. 97.7% Manuf. of machinery 95. Chemical prod. 94. MANUFACTURING TOTAL 16.7% *same period of last year = 1, seasonally and calendar effects adjusted data Sources: HCSO, CESifo, MFB IFO index: adv. 3 months IFO index: business expectations (LHS) Manufacturing production (y/y, RHS) Chart 5: Manufacturing sales and orders (y/y) Chart 6: Construction production and orders (y/y) 5 * 6-month rolling average Domestic orders* Export orders* Domesic sales* Export sales* Stock of orders at the end of the month (LHS) New orders (LHS) Construction output (RHS) Periscope June 215 6

7 Consumption Consumption became one of the drivers of economic growth Hungar households consumption expenditure increased by 2. (y/y) in Q1 this year, and the overall contribution of actual consumption to economic growth was 1.7 percentage points between January and March 215 (Chart 1). Retail trade expanded by. on a monthly basis and 5. on an annual basis in March, and then year-on-year growth accelerated to 5. in April (Chart 2). The sales of food products only grew by 1. y/y in April, which is partly explained by the restriction of stores Sunday opening hours (which may also be the reason behind the decline in consumer confidence early this year and its slow recovery), while the 9.7% growth in fuel sales was stimulated by low oil prices (Charts 3-4). Following bank settlement and the conversion of foreign currency loans to Hungarian forints, loan repayments still exceed new borrowings in the household sector, as the value of the former was HUF 62. billion higher than that of the latter in April. As employment increases, the burden caused by the repayment of foreign currency loans eases, and real wages rise, households disposable income may grow, which may in turn stimulate consumption in the months to come (Charts 5-6). Chart 1: GDP growth and contribution of households' actual consumption to GDP growth (y/y) Chart 2: Retail trade volume* in Hungary percentage point 5, 2,5, -2,5-5, -7,5-1, Q1 28 Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q1 213 Q3 213 Q1 214 Q3 214 Q , 2,, -2, -5, -7, -1, Social transfers in kind from NPISHs (LHS) Social transfers in kind from government (LHS) Household final consumption expenditure (LHS) GDP growth (RHS) Month/month (LHS) * seasonally adjusted and adjusted data by working days Year/Year (RHS) Chart 3: Retail trade by the main product groups (y/y) (volume index adjusted for calendar effects) * adjusted for calendar effects Chart 5: Retail trade and net wages in Hungary (y/y) Retail trade volume Non-food products Foods Fuels *without fostered workers Net real wages* Chart 4: Consumer confidence* in Central and Eastern Europe Sources: European Commission, MFB Poland Czech Republic Slovakia Hungary Romania Chart 6: Loans to households (January 28 = 1) * seasonally adjusted data Personal loans Car purchase loans Consumer and other loans Housing loans Mortgage loans for consumption purpose Periscope June 215 7

8 Labour market Employment growth is gradually reaching its upper limits The unemployment rate reached 7. in Q1 215, which is.5 percentage points lower than in the period one year before. The activity and employment rates stood at 59. and 54., respectively, representing an increase of 1. and 1. in a similar comparison, mainly attributable to economic growth: the number of public works employees dropped by 5.4 thousand, while that of non-public works employees increased by 84.4 thousand. At the same time, the number of fixedterm employment contracts, which are relatively sensitive to economic development, stopped to grow in Q1 as a result of the gradual slowdown of economic growth (Charts 1-2). The May decline in employment plans and the deceleration of the annual growth in the number of people in employment indicate that the Hungarian labour market is approaching the limits of its labour absorption capacity (Chart 3). While the beginning of the spring period generated 179 thousand new job openings in March, only 16.7 thousand of these were not connected to subsidy applications from the employer (Chart 4). The number of employees rose by 3. in the private sector, but fell by 4. in the public sector in March 215 (y/y). As a result of the wage compensation provided to tens of thousands of employees in the public sector, wages rose at a higher rate on an annual basis in the public sector (+6.7%) than in the private sector (+3.) (Charts 5-6) % 7% Chart 1: Activity rate, employment rate and unemployment rate in Hungary (population aged 15-74) % 5 57% % 4 47% Unemployment rate (LHS) Employment rate (RHS) Activity rate (RHS) thousand employees with fixed-term contract Chart 2: Economic growth and number of employees with fixed-term contract * 4-quarter rolling average Q1 29 Q2 29 Q3 29 Q4 29 Q1 21 Q2 21 Q3 21 Q4 21 Q1 211 Q2 211 Q3 211 Q4 211 Q1 212 Q2 212 Q3 212 Q4 212 Q1 213 Q2 213 Q3 213 Q4 213 Q1 214 Q2 214 Q3 214 Q4 214 Q1 215 GDP growth (y/y, RHS) Number of employees having fixed-term contract* (LHS) Chart 3: Employment expectations and number of employees in the manufacturing sector Chart 4: Registered new supported and not supported vacancies Employment expectations: -3 5 months adv Sources: European Commission, HCSO, MFB Employment in manufacturing (y/y, RHS) Employment expectations (LHS) thousand people thousand Supported new vacancies (LHS) Sources: National Employment Service, Not supported new vacancies (LHS) MFB Share of supported new vacancies (RHS) Chart 5: Changes in number of employed persons (March 215, same period of the previous year = 1) Chart 6: Changes in gross wages* (March 215, same period of the previous year = 1) Accommodation, food service act. Administrative & support service act. ICT Wholesale and retail trade Transportation, storage Construction Industry Education Agriculture Health care Financial intermediation Public administration Real estate activities Social work activities Business sector Budgetary institutions TOTAL % 13.7% Sources: HCSO, MFB Social work activities Agriculture Transportation, storage Construction Industry Administrative and support service act. Education Real estate activities Public administration Accommodation, food service act. Wholesale and retail trade ICT Financial intermediation Health care Business sector Budgetary institutions Total * gross earnings without premiums and one month bonuses 9 99,9% % % 13.7% % 1.7% , 16,7% 14, Periscope June 215 8

9 Inflation Consumer prices increased both on an annual and monthly basis after a period of ten months In line with the trend following last year s price drop, the price of Brent crude fell by 2. in May following the price fluctuations caused by the adjustment in supply and demand and as a result of the strengthening of the dollar against the euro. The price per barrel stood at USD 63.6 at the end of the month (Chart 1). In April in Hungary, agricultural and industrial producers prices fell by 8. (y/y) and 1.7% (y/y), respectively, with the latter involving a 3. drop in domestic sales prices and a still lower decrease of. in export sales prices (Chart 2). In May, consumer prices rose by. (y/y), while the average rate of increase in the price of consumer goods hit a two-year high at.7%. As an indication of the gradually strengthening price pressure, the 12-month core inflation rate reached 1. (+.1 percentage point as compared to the data for April), and the prices of products with rarely changing prices, which predict inflation trends fairly well, also increased at a rate last seen two and a half years ago (2., +.1 percentage point as compared to the rate of April) (Charts 3-4). Low fuel prices have a weakening downward impact on the price index due to the base effect, and the consumer price index was reduced by a mere.6 percentage points by the decline in fuel prices in May, while food and fuel prices increased at the highest rate on a monthly basis (Charts 5-6). Chart 1: USD/EUR exhange rate and the world crude oil price Chart 2: Producer price index of industry and agriculture, export price index and import price index in Hungary (y/y) 1,4 1,35 1,3 1,25 1,2 1,15 USD strengthenening $/barrel Pruducer price index of agricultural products Pruducer price index of industry 1,1 1,5 Sources: Reuters, MFB Import price index 1, USD/EUR (bal t.) Brent Crude Oil (RHS) Export price index Chart 3: Core inflation, monthly and yearly changes of consumer price index in Hungary Chart 4: Underlying inflation indicators (y/y) 1 2, 2, 1, 1,, Demand sensitive* inflation Core inflation excluding indirect taxes Sticky price inflation, - -, Sources: HCSO, NBH, MFB - -1, CPI (m/m, RHS) CPI (y/y, LHS) Core inflation (y/y, LHS) Chart 5: CPI by the main groups of goods and services *excluding changes in processed food prices from core inflation adjusted for tax changes Chart 6: Changes of consumer prices by the main groups of products and services (May 215, m/m) 7% % Other goods, including motor fuels Food Clothing and footwear Alcoholic beverages, tobacco Services Consumer durable goods.7% % Foods Market services Alcohol, tobacco Regulated goods & services Industrial products Market energy Fuel CPI Fuel and power. TOTAL,., 1, 1, 2, Periscope June 215 9

10 Banking sector The situation and prospects of the financial intermediary system are better than one year before In Q1 215, the pre-tax and after-tax profits of credit institutions reached HUF 75.1 billion and HUF 62.8 billion, respectively, representing substantially the same result as that of the period one year before. Banks attempted to compensate for their falling interest margins and non-interest earnings by cutting operating costs further (Chart 1). Between December 214 and March 215, the volume of assets (-1.) and gross lending to non-financial corporations (-5.7%) reduced after an increase last year, while gross total lending (-4.7%) and lending to households (-7.) continued to shrink, with the latter being largely the result of settlement and the conversion of foreign currency loans to Hungarian forints. With the phasing out of lending in foreign currency to households, the banking sector is becoming less dependent on direct foreign funding (Charts 2-3). Deleveraging continued in Q1 (the loan-to-deposit ratio dropped by 2.4 percentage points to 96. within three months), portfolio quality improved (the proportion of non-performing loans melted by 3.1 percentage points to 1., representing a three-and-a-half-year low), while the stability of the banking system also strengthened (the capital adequacy ratio increased from 17. to 18.) (Charts 4-6). Chart 1: Pre-tax profit of Hungarian credit institutions Chart 2: Balance sheet total and total loans of Hungarian credit institutions * unaudited * Q Sources: NBH, MFB Total assets Total loans Total loans to non-financial enterprises Chart 3: Domestic deposits and foreign liabilities of Hungarian credit institutions Chart 4: Loan-to-deposit ratio (LTD ratio) of credit institutions (December 26 - March 215) Domestic deposits Foreign liabilities Total Corporate sector Household sector Chart 5: Proportion of non-perfoming loans* * total amount of loans overdue over 9-days / total loans Total loans Household loans Corporate loans Loans of local governments % 1 17% Chart 6: Capital adequacy ratio of the banking sector in some Central Eastern European countries Sources: NBH, KNF, CNB, NBS, BNRO, MFB Hungary Poland Czech Republic Slovakia Romania 2 19% 1 17% Periscope June 215 1

11 Corporate funding Despite falling interest rates on loans, the amount of corporate loans declined further in April The total amount of corporate loans in Hungary fell by HUF 34.9 billion to a new nine-year low of HUF billion in April 215, with the decline mainly resulting from the contraction of the forint loan segment by 34.6 billion. Based on maturities, the total amount of 1 5-year loans increased (HUF billion) following a significant contraction in March, while that of loans with both shorter and longer maturities decreased (HUF billion and HUF billion). Based on transactions, the total amount of forint and foreign currency loans dropped by HUF 9.5 and 16.1 billion, respectively (Charts 1-3). In the SME segment, with the leadership of medium-sized companies, both the total and the average amount of investment loans increased in Q1, bringing a turn in the one-year long downward trend (Chart 4). In the segment of 1 5-year loans, the increase in interest rates experienced in March proved to be temporary, and the average interest rate melted from 4.5 to 4.2 within one month, while the interest rate on loans with longer maturities fell by 21 basis points (based on revised data) to a new record low of 3.9, which is getting ever closer to the pricing of loans in the Czech Republic (Charts 5-6). Chart 1: Total amount of corporate loans by maturity structure Chart 2: Total amount of corporate loans by currency year 1-5 years over 5 years 1 HUF loans FX loans Total loans Chart 3: Change in total amount of outstanding non-financial corporate loans through loan transactions Chart 4: : Total amount and average size of investment loans regarding SME sector HUF loans FX loans Total loans Sources: NBH, MFB Average size of investment loan (RHS) Total amount of investment loans (LHS) HUF million Chart 5: Interbank interest rates*, and interest rates on corporate loans** Chart 6: Interest rates on corporate loans* in Central and Eastern European countries 1 1 Sources: ECB, NBH, MFB BUBOR Hungary 1 EURIBOR HUF loans - over 5 years Czech Republic Poland * 3-month interbank rates ** annualised interest rates weighted by month-end values HUF loans years EUR loans in Hungary - over 5 years EUR loans in Hungary years 1.21 Sources: ECB, NBH, MFB * annualised interest rates over 5 year maturity, weighted by month-end values, in national currency Slovakia Romania Bulgaria Periscope June

12 Exchange rates The Hungarian currency s weakening in May was primarily due to country specific factors In May, the European common currency depreciated at a rate of 2. against the US dollar as a result of the European Central Bank s continued commitment to asset purchases and the still unresolved and increasingly worrying Greek debt situation (Chart 1). Although the global investment climate remained relatively favourable and supported emerging currencies, the Hungarian currency lost 2. in value compared to the euro and depreciated at a rate of 4.3 and 3. against the US dollar and the Swiss franc, respectively (month-end exchange rates: 38.9 HUF/EUR, HUF/USD and HUF/CHF (Charts 2-3). Among Central and Eastern European currencies, the Romanian leu depreciated by., the Polish zloty moved closely together with the Hungarian forint and weakened by 2., while the Czech koruna, considered a safe haven currency in the region, appreciated by. against the euro (Chart 4). The Hungarian forint was weakened by the diminishing yield on Hungarian government bonds and the strengthening expectations regarding further interest rate cuts by the central bank (Charts 5-6). Chart 1: The exchange rate of the euro against the US dollar and the Swiss franc Chart 2: The HUF/EUR exchange rate and the global risk appetite 1,4 1,35 1,3 1,25 USD/EUR CHF/EUR 1,4 1,35 1,3 1, HUF/EUR (LHS) Sources: CBOE, ECB, MFB VIX index (RHS) ,2 1,15 1,1 SNB gives up minimum exchange rate 1,2 1,15 1, point 1,5 1,,95 euro weakening 1,5 1,, increasing global risk appetite Chart 3: The exchange rate of the forint against the Swiss franc, the US dollar and the euro Chart 4: The exchange rates of Central and Eastern European currencies against the euro HUF/EUR (LHS) HUF/USD (RHS) HUF/CHF (RHS) Sources: ECB, MFB strengthening against the euro Sources: ECB, MFB * = % 99% Czech koruna Hungarian forint Romanian leu Polish zloty Chart 5: The HUF/EUR exchange rate, 3 and 12-month bill yield spread Sources: Government Debt Management Agency, Reuters, MFB HUF/EUR (LHS) 3-month bill yield spread between Hungarian and German treasury bills (RHS) 12-month bill yield spread between Hungarian and German treasury bills (RHS) basis points Chart 6: The HUF/EUR exchange rate, the Central Bank's base rate and market based expectations about the base rate in the future* 33 8, 32 7, 31 6, 3 5, 29 4, 28 3, 27 2, Sources: ECB, NBH, MFB 26 1, HUF/EUR (LHS) Central Bank's base rate (RHS) Interest rate expectations on 29th May 215 (RHS) Interest rate expectations on 3th April 215 (RHS) Interest rate expectations on 31th March 215 (RHS) * based on BUBOR fixings and 1x4, 3x6, 6x9, 9x12 forward rate agreements (FRAs) Periscope June

13 General government and its financing This year s budget figures are developing as planned On the basis of preliminary data, between January and May 215 the central budget deficit amounted to HUF billion, reaching 71. of this year s target, while the amount of the deficit produced in the first five months of 214 (HUF billion) was close to the deficit foreseen for the entire year (reaching 97. of the target). The detailed figures of the first four months indicate that the balance being more favourable than last year s resulted from, to a lesser extent, an increase in revenues (HUF billion) and, for the most part, the reduction of expenditure (HUF billion). The former was driven by an increase in the revenues from the taxes levied on consumption (HUF billion), while the reduction of expenditure was mainly due to the fact that the state spent HUF less on supporting general government subsystems between January and April 214 (Charts 1-2, Table 1). In May, secondary market yields on discount treasury bonds fell by basis points in line with the central bank s interest rate cuts, while 5 and 1-year reference yields fell by 8 and 4 basis points to 2.8 and 3.4, respectively. Compared to the Visegrád Countries and Romania, the 1-year yield only fell in Hungary, also as a result of the Fitch s decision on changing the Hungarian sovereign debt outlook from stable to positive in May, which raises the prospect of upgrading. The stock of Hungarian government bonds held by foreigners shrank by HUF 31.6 billion, while the average residual maturity of the portfolio increased by.1 year (Charts 3-4) Chart 1: Revenues and expenditures of central budget between January and April (billion HUF) Sources: Ministry for National Economy, HCSO, MFB value of balance Payment of economic organizations Taxes in consumption Payment of households Central budgetary institutions Other revenues Family benefits, social subsidies Payments of central budgetary institutions Transfers to general government subsystems Debt service Other expenditures Balance of central budget Chart 2: The proportion of cumulated central government budget deficit in ratio of the yearly target Sources: Ministry for National Economy, HCSO, MFB Chart 3: Reference yields on Hungarian government securites Table 1: The revenues of the central government and the social security funds by main groups CENTRAL GOVERNMENT Taxes imposed on corporations Corporate income tax Taxes imposed on SMEs Special taxes on banks and branches Taxes imposed on consumption total income (estimation) January - April % of yearly revenues yearly revenue target January - April % of yearly revenue target 11 8, ,4 26,9% 1 89, ,1 3, 1 35,1 41, 3,7% 1 36, 43,6 33, 394,8 117,6 29, 341,4 112,3 32,9% 151,7 41,2 27, 156,5 42,7 27, 25,9 61,3 29, 24,8 64,7 31, 4 335, , 28, 4 396,7 1 32,2 29, Value added tax 3 35,6 832,2 27, 3 172,4 92,9 28, Excise tax 918,9 255,3 27, 913,5 287,2 31, Financial transaction tax Taxes imposed on households 277,9 99, 35, 26,2 76,6 37, 1 753,8 588,6 33, 1 86,6 623,9 34, Personal income tax 1 589,1 531,1 33, 1 639,7 561,2 34, Pension Fund 3 124,5 1 32,8 33, 3 24,6 1 1,2 33, Health Care Fund 1 97,1 648,3 34, 1 91,8 646,7 33, Sources: Ministry for National Economy, HCSO, MFB Chart 4: Non-resident holdings in HUF government securities and duration 5, 5, 4, 4, 3, 3, 2, 2, 1, 1, Sources: Government Debt Management Agency, NBH, MFB month 6-month 12-month 5-year 1-year NBH base rate 1-year CDs spread bázispont Periscope June ,2 5,1 5, 4,9 4,8 4,7 Non-resident holdings of Hungarian government securities (LHS) Duration (RHS) Sources: Government Debt Management Agency, MFB year