Hungarian manufacturing continued to contract in October following a shocking performance in September, while exports drop sharply in the midst of a looming global manufacturing recession. All of which indicates that the real economy impacts of the recent financial turbulence is now about to make its presence felt. I think we are in for a real shocker in Hungary.
October PMI Down
Hungary's manufacturing industry contracted sharply in October, according to the latest PMI reading, which fell 5.2 points to hit 44.7 in October - a historic low, and 0.8 points below the previous worst reading registered in October 1998, according to the latest data from the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM).
Sharp Industrial Output Contraction In September
Hungarian industrial production dropped the most in more than 16 years in September as the global financial crisis hit the economy and slowing growth in western Europe curbed demand for exports. Production was down 5.3 percent from a year earlier on a working day adjusted basis, following a 1.2 percent drop in August. This was the rapidest annual decline since August 1992, according to the national statistics office (based on preliminary data).
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Output was down a seasonally and working day adjusted Output 2.4 percent month on month.
Output also fell for a fourth month for the first time since 1992 as the euro region, which buys 57 percent of Hungarian exports, looks set to enter its first recession since the launch of the single currency and crimped demand for Hungarian assembled products like Audi cars and Nokia phones. The economy of the 15 countries contracted in the second quarter for the first time since the common currency's creation, and it is a pretty sure bet it continued to contract in the third one.
“Preliminary September industrial production data was yet another stark reminder that Hungary is feeling the pain from the global slowdown. Although output “only" fell by 0.7% y-o-y according to unadjusted data (versus the huge, 5.9% drop seen in August), working day adjusted figures showed a much darker picture: on a workday-adjusted basis, output fell by a whopping 5.3% versus the 1.2% decrease observed during the last summer month. The month-on-month figure was just as dreadful, exhibiting a precipitous, 2.4% fall (contrasting the 0.8% pick-up seen during the preceding month)."
György Barta, CIB Bank, Budapest
“Headline GDP growth in Q4 could be well below zero even including the beneficial impact of farming. In light of the most recent data, the -1.0% GDP forecast of the 2009 budget draft seems at the very optimistic end of the possibilities as the joint effects of the fiscal and monetary shocks aggravate the growing problems of the real economy."
Gábor Ambrus, 4Cast, London
Hungary's export-driven economy is expected to contract by 1 percent next year as a result of the global economic decline, according to the latest government estimates, although as Gabor Ambrus notes, even this number now looks pretty optimistic. If things continue like this, a contraction of GDP in the 3 to 5% range would not surprise me. The crisis, which recently forced the country to line up 20 billion euros ($26.1 billion) in emergency loans, have now long since dashed hopes for a recovery from 2007's 1.1 percent growth rate, already the slowest growth in 14 years.
August Exports Drop Year On Year
The national statistics office confirmed during the week (Wednesday) that Hungary posted a trade deficit in August - running at a revised EUR 76.1 million (down from the prelim EUR 103.7 million). The January-August balance was a EUR 24.8 million surplus (as compared with a prelimary EUR 2 million surplus), and this compares positively with the deficit of EUR 457.2 m clocked up in the same period of 2007.
Exports in August 2008 totalled EUR 5,366.3 m (vs. prelim EUR 5,378.3 m), down 0.9% year on year, compared to a growth of 8.2% in July. The export volume growth of 4.2% in July turned into a decline of 6.8%, a far cry from the year to date average of a 7.7% increase. Negative export growth had not been seen in Hungary for five years.
Imports stood at EUR 5,442.4 million, revised up by nearly EUR 40 m from the preliminary estimate. The 12 month running total was also revised from the preliminary -1.9% to -2.6%. Imports were up in July at 12.4% year on year as record oil prices boosted the total. In volume terms Hungarian imports plunged 8.5% year on year in August as compared with a 8.3% increase in July.
The JP Morgan Global Manufacturing Index Plummets Too
The October manufacturing contraction in Hungary really forms part of a much larger global picture, since the current dramatic events in Hungary have, above all, a global backdrop, one which the current dependce of the Hungarian economy on exports only serves to highlight.
Manufacturing output fell in October in one country after another, and indeed the latest JP Morgan Global PMI report really does makes for quite depressing reading.
The world manufacturing sector suffered its sharpest contraction in survey history during October, as the ongoing retrenchment of global demand and further deepening of the credit market crisis negatively impacted on the trends in output, new orders and employment. The JPMorgan Global Manufacturing PMI posted 41.0, its lowest reading since data were first compiled in January 1998 and a level below the no-change mark of 50.0 for the fifth month in a row.
Output, total new orders and new export orders all contracted at the fastest rates in the survey history in October. With the exception of India, which again bucked the global trend, all of the national manufacturing surveys posted declines in output and new orders. The impact of the downshift in global market conditions also had a far-reaching effect on international trade volumes. Although new export orders fell at a slower rate than total new business, all of the national manufacturing sectors covered by the survey (including India) saw a reduction in new export orders.
"October manufacturing PMI data reinforce the stark retrenchment that the sector is currently facing, with production, total new business and new export orders all falling at record rates. The latest Output Index reading is consistent with a fall in global IP of almost 8%. The only positive from the surveys was a decline in input prices for the first time since August 2003."
David Hensley, Director of Global Economics Coordination at JPMorgan
Economies across the Eurozone are being affected. In Italy, manufacturing activity contracted at the fastest rate in at least 11 years in October according to the latest Markit/ADACI PMI survey out yesterday (Monday). The Markit Purchasing Managers Index fell to 39.7, its lowest since the series began in 1997, down from 44.4 in September. The Italian manufacturing PMI has now not been above the 50 mark separating growth from contraction since February and the latest data showed activity falling at an accelerating pace as demand shrank while jobs were shed at the fastest rate in the history of the survey.
Other recent indicators from Italy have also been far from encouraging, with October business confidence hit its lowest point since September 1993, when the economy seized up after Italy was rocketed out of the European Exchange Rate Mechanism a year earlier.
Germany's manufacturing sector contracted in October at the fastest pace in seven years as incoming orders and output experienced their sharpest declines in more than 12 years. The headline index in the Markit Purchasing Managers Index for what is Europe's biggest economy fell in October to 42.9 from 47.4 the previous month, well below the 50 mark that separates growth from contraction.
The French manufacturing purchasing managers index was revised down to a series low 40.6 in October, down from both the 'flash' estimate of 40.8 and September's 43.0 figure, Markit Economics said in a press release issued on Monday.
Disaggregating the figures, the output component fell to an all-time low of 37.8 from September's 41.7 level, while new orders slipped all the way to a series low of 34.9 for the month, down 2.6 points from September's 37.5 level. Purchase quantities and new export orders also saw some new record lows in October, falling to 33.7 and 38.5 respectively.
Spain's manufacturing sector continued to shrink at a record pace in October - possibly the fastest among all those included in the JPMorgan index - with both output and new orders contracting and employers shedding jobs at a near record pace, according to the latest Markit Economics Purchasing Managers Index published yesterday (Monday). The Markit PMI for Spain dropped to 34.6 in October, the lowest reading registered by any eurozone economy since the series began in February 1998 and down from the already rapid 38.3 point contraction in September. As we can see, according to this indicator Spanish manufacturing has now been weakening steadily since the start of 2006.
Central and Eastern Europe
Apart from the Hungarian decline, output also contracted elsewhere in the CEE. In Poland the ABN Amro Purchasing Managers Index fell for the sixth month running to 43.7 (down from September's 44.9) a record low and well below the neutral reading of 50, according to Markit Economics yesterday. In the Czech Republic, manufacturing output contracted for the seventh month in a row, and the index hit an all-time low of 41.2, just above the revised euro zone figure of 41.1. As the Eurozone itself contracts, these economies which are heavily dependent for exports to the zone will be buffeted, especially now that forex loans for their domestic housing markets have all but dried up.
The US manufacturing PMI dropped back to 38.9 in October from 43.5 in September, indicating a significantly faster rate of decline in manufacturing when comparing October to September. It appears that US manufacturing is experiencing significant demand destruction as a result of recent events. October's reading is the lowest level for the US PMI since September 1982 when it registered 38.8 percent. On the other hand inflationary pressures are evaporating rapidly, and the Prices Index fell to 37, the lowest level since December 2001 when it registered 33.2 percent. Export orders also contracted for the first time in 70 months.
China's PMI dropped to lows not previously seen in October, confirming that the economy of the so-called factory of the world is now decelerating along with everyone else. Two international surveys measuring the PMI independently corroborated the evidence of a cooling Chinese industrial economy.
According to a survey complied by securities firm CLSA, China's PMI fell to 45.2 in October, its third consecutive drop, from 47.7 in September, as new orders and exports, as well as pricing power, were squeezed by the global financial crisis.
"The very sharp fall in the October PMI confirms that China is more integrated into the global economy than ever. Chinese manufacturers are seeing their order books cut, both at home and abroad, as the world economy falls into recession," said Eric Fishwick, CLSA's head of economic research, in a report released Monday. "Costs are falling but so are output prices. The coming 12 months will be difficult ones for manufacturers, China included."
The government-backed China Federation of Logistics purchasing managers' index - published on 1 November - also showed a strong contraction, falling to 44.6 in October, the lowest level since the data began in 2005, from 51.2 in September:
Russian manufacturing contracted in October at the slowest pace in over two and a half years as the global financial crisis cut demand, according to the latest reading on VTB Bank Europe's Purchasing Managers' Index, which fell to 46.4 from 49.8 in September. This was the third consecutive month in which Russian industry has been contracting.
Business conditions in the Brazilian manufacturing worsened in October for the first time since June 2006. The headline seasonally adjusted Banco Real Purchasing Managers’ Index ((NYSE:PM)I) posted 45.7, down from 50.4 in September, pointing to a sharp contraction -the fastest in the survey history in fact. The PMI was driven down by accelerated declines in output and new orders, as well as falls in employment and stocks of purchases.
Even in India the seasonally adjusted ABN Amro India Manufacturing Purchasing Managers’ Index dropped steeply in October, falling to a record low of 52.2, down from a reading of 57.3 in September suggesting another sharp deceleration in growth, even if Indian industry managed to keep expanding. The biggest fall was in the new orders sub-index, which dropped to 54.4 in October from 62.6 in September. Perhaps the saving grace in the Indian survey is that most firms said demand remained strong in domestic markets, while it had been international orders which had waned. This can also be seen from the new export orders sub-index, which contracted to 49.7 for the first time in the history of the series. That fits in with the latest data showing that Indian year on year export growth slowed to 10.4% in September. Thus the Indian expansion is still hanging on in there, by its fingernails, but it is hanging on in.