Q2 GDP growth stronger than first estimate on agriculture and inventories

HUNGARY - In Brief 05 Sep 2018 by Istvan Racz

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The second estimate of Q2 GDP, out this morning, has brought about 1% qoq, 4.6% yoy on sda basis, stronger than 0.9% qoq, 4.4% yoy first release. Growth still decelerated from the 4.7% yoy of Q1 (and 4.9% of Q4 2017), but only marginally, which is definitely a positive surprise.Regarding the details, industrial sector growth slowed down significantly, services, consumption and fixed investment moderately. Construction growth was unchanged at a very high level (+23.6% yoy both in Q1 and Q2). However, agriculture recovered to +2.9% yoy from -1% yoy in Q1 and -12% yoy in Q4 2017. The latter was a strong explanatory factor; excluding agriculture, GDP growth fell from 5.5% yoy in Q4 to 4.9% yoy in Q1 and to 4.7% yoy in Q2. On the demand side, inventories proved to be quite strong, picking up a big chunk of the extra supply coming out of agriculture.The message of all this is that full-year 2018 GDP growth is now quite likely to exceed 4%, just as the Finance Ministry and the MNB have suggested in their standing forecasts. Does this mean more robust domestic demand pressures and higher inflation? Well, overall we believe that the domestic environment is turning genuinely inflationary at the current level of growth, but we are not that sure that today's surprise should add to this problem. After all, improving agriculture may be more a weather windfall (Hungary has not been hit by the same severe drought this year as many parts of Europe) than anything else, and the extra supply landed mostly in inventories, so it does not look like demand-induced.