FLASH REPORT. Full steam ahead; GDP could grow by 4.4% in 2018 and by 4% in September 2018

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1 FLASH REPORT September 1 Full steam ahead; GDP could grow by.% in 1 and by % in 19 Hungary's GDP grew by.% YoY in Q 1 (in non-adjusted terms); this figure is. ppts higher than the preliminary estimate. The adjusted figure is.% YoY, while the seasonally and calendar-adjusted annualized QoQ growth rate was %, down from.% in Q1 and 5.% in Q 17. Non-farm GDP grew by.9% YoY in Q (previous:.5%), while the nonfarm private sector s GDP grew by.1% in Q (previous: 5.%). The annualized QoQ figure for Q was.%, the same as the Q1, and less than the.7% growth in Q 17. Big picture: the Hungarian economy is definitely in the mature phase of the business cycle. The main driver of the economy was the strong level of domestic demand in the past six quarters. Gross fixed capital formation was particularly strong, adding more than 3 ppts to the.% average GDP growth rate of the past six quarters. Simultaneously with the rise in domestic demand, the contribution of net exports to growth has turned negative as the capacity constraints became binding. We should note that economic policy has been very supportive since the beginning of 17, as the changes in monetary policy included the introduction of easing measures and fiscal policy also supplied positive stimulus. These measures have significantly increased the available 'finance resources'. Our 'finance resource' indicator (loan flow to HH and NFc + our fiscal impulse indicator + non-publicsector-related capital transfers from the EU) shows a significant increase in the available/utilization of 'finance resources'. Starting from last autumn, we forecasted % GDP growth for 1, which was revised up to.% during the summer. In light of the H1 GDP growth data, we raise our GDP forecast for 1 to.%. We also lifted our growth forecast for 19 to %, because the currently delayed investments are expected to maintain strong fixed capital formation growth next year. The BMW investment in Debrecen will also start in 19, but its investment value (around EUR 1 bn, which is around 3% of the total yearly investment) will be split between 19 and. In consequence of the strong H1 investment figure, we revised up our investment growth forecast from 7.% to 13%. This is partly because fixed capital formation in the public sector in 17 was about HUF bn less than previously forecasted (it is around.5% of the total investments layouts), while private investment was stronger. Since 17, gross fixed capital formation has been boosted not only by EU-related public investment, but the contribution of private investment is also strong. In our calculation, the private sectors investment in H1 1 explains roughly percentage points of the 1% YoY growth of gross fixed capital formation. Net borrowing of non-financial corporations grew considerably, the corporate sector's domestic credit grew by around 15% in H1, and corporate FDI inflow is also picking up. Household loan flows also grew rapidly, in line with rising residential investment; the (nominal) value of newly contracted housing loans hit an all-time-high level in July. Real estate investment grew by a still sizeable 11% in H1, down from the % in 17 as a higher base and capacity bottlenecks kicked in. The main problem in the construction industry and the real estate sector is the shortage of labour, equipment, and material, which results in significant delays for most projects. In light of building permits' patterns and the delays in both private and public construction projects, we think that construction investment may reach its peak in 19. Despite strong real estate investment activity, we have not seen signs of overheating yet, as in our calculations the projects that are currently in the pipeline will not result in oversupply on the residential or commercial real estate market. Households consumption expenditure grew by 5.3% YoY, down from 5.9% in Q1, while the annualized QoQ growth rate was.% in Q (down from 5% in Q1 and.% in Q according to our in-house adjustment). We revise our consumption forecast up from.% to 5.%, as a consequence of stronger-than-expected real income growth. In H1, nominal wage growth in the total economy was 1% and it remained in double-digit territory in both the private and the public sectors. We currently estimate that nominal wage growth (in both sectors) may remain around 1% for 1 as a whole, up from our previous forecast of %. Trading Desks Dealing code: OTPH Live quotes at OTP BLOOMBERG page This report is available at BLOOMBERG: OTP/Macroeconomics Research page Fixed Income Desk András Sovány SoványA@otpbank.hu Benedek Károly Szűts SzutsB@otpbank.hu FX Desk András Marton MartonA@otpbank.hu József Horváth Horvath.Jozsef@otpbank.hu Money Market Desk Gábor Fazekas FazekasGa@otpbank.hu Gábor Heidrich HeidrichG@otpbank.hu Judit Szombath SzombathJ@otpbank.hu FX Option Desk Gábor Réthy RethyG@otpbank.hu Máté Kelemen KelemenMat@otpbank.hu Analyst Győző Eppich eppichgyo@otpbank.hu

2 Nevertheless, it is surprising that in this phase of the business cycle the stronger-thanexpected income growth results in rising net financing capacity, rather than in rising consumption. The net financing capacity of households has been on the rise again since wage growth reached a double-digit pace at the beginning of 17. There can be two reasons for this phenomenon: o o Households might believe that the current rapid income growth will be temporary. In this case, consumption growth may remain around -5% for a while, even if the real income growth will decelerate, as households can smooth their consumption through declining net financing capacity. Due to rising housing prices and LTV restrictions, households need to increase their saving to ensure the availability of their down-payments. In this case, the current increase in households' net financing capacity could be temporary. Main macro forecasts Key economic indicators OTP Focus Economics F 19F 1F 19F Nominal GDP (at current prices, bn HUF) Real GDP change.7% 1.7% -1.%.1%.% 3.%.%.%.%.%.% 3.1% Household final consumption -.%.7% -.%.5%.1% 3.1%.%.1%.%.%.7% 3.% Household consumption expenditure -.%.7% -.%.%.5% 3.%.9%.7% 5.3% 5.% Collective consumption.%.% -.3%.5% 9.%.%.1% -.% 1.1% 1.1%.% 1.% Gross fixed capital formation -9.5% -1.3% -3.% 9.% 9.9% 1.9% -15.5% 1.% 13.% 9.% 1.% 5.% Exports 11.3%.5% -1.%.% 9.% 7.7% 5.% 7.1% 5.%.% Imports 1.%.% -3.5%.5% 1.9%.1% 5.7% 9.7%.%.% General goverment balance (ESA'1 based, HUF bn) in percent of GDP -.5% -5.% -.% -.% -.% -1.9% -1.7% -.% -.% -.% -.% -.% General goverment debt (in percent of GDP) 79.7% 79.9% 77.% 7.% 75.% 7.% 73.9% 73.% 73.3% 71.1% 71.% 7.% Current account (EUR bn)* in percent of GDP.3%.7% 1.% 3.% 1.5% 3.5%.1% 3.% 1.9% 1.%.% 1.% Gross nominal wages**.% 3.% 5.9% 3.% 3.%.3%.5% 11.9% 9.9% 7.% Gross real wages -.7% -.%.%.% 3.%.%.1% 9.3% 7.1% 5.3% Gross disposable income***.%.7% 1.%.7%.%.%.7% 7.3% 7.1% 5.% Gross real disposable income -.7%.% -3.% 1.%.%.%.3%.%.% 3.1% Employment (annual change) -.%.7% 1.% 1.7% 5.3%.7% 3.% 1.7%.%.3% Employment domestic concept w/o public workers -1.5%.3% -.%.5% 3.3% 1.5% 3.3% 3.% 1.3%.9% Unemployment rate (annual average) 11.% 11.% 11.% 1.% 7.7%.% 5.1%.% 3.9% 3.9% 3.% 3.7% Inflation (annual average).9% 3.9% 5.7% 1.7% -.% -.1%.%.%.%.%.% 3.% Base rate (end of year) 5.75% 7.% 5.75% 3.%.1% 1.35%.9%.9%.9% 1.5%.9% 1.% 1Y Treasury Bill (average) 5.%.% 7.%.11%.% 1.17%.77%.9%.1% 1.5% Real interest rate (average, ex post).7%.1% 1.3%.3%.5% 1.%.% -.3% -.1% -.9% EUR/HUF exchange rate (average) EUR/HUF exchange rate (end of year) Sources: CSO, MNB, OTP Bank *: Official data of balance of payments (excluding net errors and ommissions) **: Total wages including accrual based salaries in governmental sector. In the case of private sector wages we calculated with whitening effect filtered wages and we adjusted the changeable seasonality of the bonus payments. ***: Calculation based on financial accounts data

3 7/Q1 7/Q3 /Q1 /Q3 9/Q1 9/Q3 1/Q1 1/Q3 1/Q1 1/Q3 1/Q1 1/Q3 1/Q1 3/Q1 3/Q3 /Q1 /Q3 5/Q1 5/Q3 /Q1 /Q3 7/Q1 7/Q3 /Q1 /Q3 9/Q1 9/Q3 1/Q1 1/Q3 1/Q1 1/Q3 1/Q1 1/Q3 1/Q1 /Q1 1/Q1 /Q1 3/Q1 /Q1 5/Q1 /Q1 7/Q1 /Q1 9/Q1 1/Q1 1/Q1 1/Q1 1/Q1 7/Q1 7/Q3 /Q1 /Q3 9/Q1 9/Q3 1/Q1 1/Q3 1/Q1 1/Q3 1/Q1 1/Q3 1/Q1 5/Q1 5/Q3 /Q1 /Q3 7/Q1 7/Q3 /Q1 /Q3 9/Q1 9/Q3 1/Q1 1/Q3 1/Q1 1/Q3 1/Q1 1/Q3 1/Q1 3/Q1 3/Q3 /Q1 /Q3 5/Q1 5/Q3 /Q1 /Q3 7/Q1 7/Q3 /Q1 /Q3 9/Q1 9/Q3 1/Q1 1/Q3 1/Q1 1/Q3 1/Q1 1/Q3 1/Q1 Chart 1: Summary chart of GDP growth (annual and annualized QoQ growth rate, %) Chart : Different indicators of economic activity (annual changes, %) GDP (annual change) GDP (annualized QoQ change, CSO) GDP (annualized QoQ change, OTP) GDP Non-farm private sector Non-farm GDP Chart 3: 'Finance resources' of the economy (% of GDP) 1 1 Non-public EU transfers 1 Fiscal impulse 1 NFc loan flow HH loan flow Total Chart : Decomposition of GDP growth by expenditureside items (quarterly data, %) Consumption expenditure of households Gross fixed investment Net export Government consumption Inventories GDP Sources: MNB, OTP Research Chart 5: Decomposition of GDP growth by productionside items (quarterly data, %) Chart : Summary chart of investment growth (annual and annualized QoQ growth rate, %) Agriculture Industry Construction Market services Government services Taxes on production less subsidies GDP Investment (annual change) Investment (annualized QoQ change, OTP) Investment (annualized QoQ change, CSO)

4 1995/Q1 1995/Q 199/Q3 1997/Q 199/Q1 199/Q 1999/Q3 /Q 1/Q1 1/Q /Q3 3/Q /Q1 /Q 5/Q3 /Q 7/Q1 7/Q /Q3 9/Q 1/Q1 1/Q 1/Q 13/Q 1/Q3 15/Q 1/Q 1/Q /Q1 5/Q3 /Q1 /Q3 7/Q1 7/Q3 /Q1 /Q3 9/Q1 9/Q3 1/Q1 1/Q3 1/Q1 1/Q3 1/Q1 1/Q3 1/Q1 199/Q1 1999/Q1 /Q1 1/Q1 /Q1 3/Q1 /Q1 5/Q1 /Q1 7/Q1 /Q1 9/Q1 1/Q1 1/Q1 1/Q1 1/Q1 Chart 7: Investment activity by sectors (decomposition of annual change, %) 3 Chart : Building permits and housing constructions (annualized unit) 7 Completed dwellings Building Permits Private sector Core public sector Public sector related quasi fiscal Total economy Chart 9: Office occupancy rates (%) Chart 1: Nominal wage growth (YoY, %) Public sector wage Private sector wage Chart 11: Financial asset acquisition and net financing capacity of households (in % of GDP) Chart 1: New business of household loans (monthly, HUF bn) Sources: MNB, OTP Research housing loans Sources: NBH, OTP Research consumer loans & mortgage for comsumer purposes

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