GDP - Economic Growth Rallies On Strong Investments In Q1

Economic growth in Q1 grew 5.3% y-o-y, equal to the flash estimate, and up from the 5.1% in the last quarter of 2018.

gdp growth (same quarter in previous year = 100)

Source: CSO, Concorde

Main features of the Q1 economic growth are:

• household consumption was strong, and even accelerated mildly from the previous growth rates (to 4.8%);
• investments skyrocketed, helped by the EU-financed and state-sponsored infrastructural projects, and also by household investments, namely the surge in new home constructions partly triggered by government subsidies;
• services remained strong, though lost some momentum from the previous quarter.
• Manufacturing rose at a speed of 5.8% y-o-y  in Q1, defying the slowdown in major trading partners.
• Agriculture’s value added was this time negative, as dry weather reduced output.

level of industrial output (2001 dec = 100)

Source: CSO, Concorde

Ifo institute’s latest releases of German manufacturers’ outlook dropped by the end of last year, and hovered around that level in Q1. Having been broadly indicative of the Hungarian industrial production figures, we estimate a deceleration in industrial production is in the making. That said, the obvious divergence indicates the outsourcing activity may be able to dampen the German slowdown’s impact on Hungarian production (end exports).

0contribution to gdp growth (pps)

Source: CSO, Concorde

gdp growth by final use (y-o-y)

Source: CSO

Households’ final consumption rose to 4.8% (from the previous quarter’s 4.3% annual growth rate).

With respect to the future, we see consumption to keep growing on the back of

• the low interest rate environment;
• rising lending volumes;
• and elevated wage growth.

Q1 investments growth rose 23.4% y-o-y, backed both by a rise in EU-financed investment projects as well as dynamic residential housing and state-sponsored investments.

INVESTMENTS composition (yoy growth)

Source: CSO, Concorde

The share of fixed asset accumulation in GDP has fluctuated between 18% and 24% in the last two years, while Q1 figures shot through the roof, reaching a whopping 28%. This volatility reflects the huge importance of the timely evolution of absorption of EU funds.

Interesting to see that the strong domestic demand was compensated for by the steep fall in inventories, not imports. This may suggest that the previous quarters’ heavy drop in trade balance could have been exaggerated and may have served partly later quarters’ use. As such, the external balance averaging at or slightly above zero could remain our base forecast.

FIXED ASSET INVESTMENTS (% of gdp)

Source: CSO, Concorde

contribution to gdp growth (pps)

Source: CSO, Concorde

To sum up, Q1 growth – similarly to the developments in previous quarters – reflected a strong consumption and a strong, but heavily concentrated investment activity. Also interesting to see is the relatively small impact of Q1 activity on external imbalances.

We see households remaining the main driver of growth, likely keeping the current growth rate, while investments could start decelerating in the quarters to come. The government’s fiscal easing package announced yesterday, could have a cumulative positive 0.3% impact on economic growth this year and the next. The most important elements of this package are the 2pps reduction in the social security contribution rate, and the drop in the VAT paid by hotels from the standard 27% to 5% as of July 1^st.

 

With the fiscal package kicking in in H2 and the much higher than originally forecast investment activity in Q1 prompts us to raise our growth forecast for 2019 from the previous 4% to 4.2%.

 

 

 

 

 

Hai Thanh Le Phuong, CFA
Head of Research

CONCORDE SECURITIES LTD.

Alkotás Point
50 Alkotás street, H-1123 Budapest.
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