Unorthodox Economics Gets Sentiment Wake-Up Call in Hungary

(Bloomberg) -- The Hungarian government’s message that unconventional policies will kick start growth doesn’t seem to be getting through to businesses and their customers.

Economic sentiment slumped in August, compounding mixed readings for industrial production and raising the risk that output will undershoot the government’s full-year forecast. The overall sentiment index dropped to negative 3.9, from zero in July, while the business gauge slipped to 1.2, the lowest since November 2013, the GKI research institute said in an e-mail Monday. The consumer-confidence index also fell, declining to minus 18.6 from minus 16.1.

While Prime Minister Viktor Orban has championed economic policies financed by taxes on big companies including banks and grocery chains and the nationalization of private pension assets, the sentiment figures indicate businesses and consumers aren’t as enthusiastic. His government has pledged to cut taxes next year and boost incentives to accelerate the pace of growth to as much as 5 percent. But slowing investment may put both that goal and the 2016 estimate of a 2.5 percent expansion out of reach.

“I don’t think we will see very robust growth numbers in the second half,” said David Nemeth, an economist at KBC Groep N.V.’s Hungarian unit. “Investment will only start returning when businesses see policy is following a predictable path, the environment doesn’t change drastically each year, people don’t have the impression that certain economic sectors are penalized at a whim, and rule of law is stable.”

Industrial Slump

The eastern European nation’s economy expanded 2.6 percent in the second quarter, after unexpectedly shrinking 0.8 percent in the first three months of the year, trailing neighbors Romania, Slovakia and Poland.

The forint has gained 0.2 percent against the euro at 4:31 p.m. in Budapest. It’s 1.7 percent stronger this quarter, making it the third-best performer among 10 east European and African currencies tracked by Bloomberg. The yield on Hungary’s 3-year government bond was at 1.38 percent, trading close to its record-low of 1.35 percent.

While it’s still early, the data conflict with the government’s prediction that second-half revivals in retail sales, industrial output and the inflow of development funds from the European Union may counteract the first quarter contraction and temper the slowdown from last year’s 2.9 percent expansion.

Low Rates

The central bank has also tried to pitch in. It has reduced the benchmark interest rate to a record-low 0.9 percent and is providing free funding to commercial banks to boost corporate lending and help stimulate economic activity. The bank sees the economy increasing by 2.8 percent this year.

Still, sentiment deteriorated in all four business segments in August. The steepest decline came in industry, the engine of the economy, as the outlook on output and new orders worsened, GKI said. That followed an unexpected 0.3 percent annual drop in industrial production in June, the last month for which data are available.

Consumer expectations regarding their financial situation over the next year also deteriorated, as well as their outlook on the economy’s performance, the research institute said. It bases its indexes on a balance of positive and negative answers to questions about the outlook for the economy.