According to the CSO’s flash estimate, GDP declined 2% y/y in the last quarter of 2008 - after the 0.8% y/y increase seen in 3Q08. Taking the calendar effect into consideration, the economy dropped by 2.1% y/y in October-December. Compared to the previous quarter, GDP dropped 1%. As the q/q indicator was also negative in the third quarter (- 0.5%), a technical recession has arrived, as two quarters declined in a row. In FY2008, GDP rose just a tiny 0.6% y/y. The CSO indicated that industrial output and financial services pulled down the GDP figure, while the performance of agricultural production improved it. The CSO will release detailed figures on 11 March.
As for the GDP growth prospects, the outlook is rather dim for 2009. The 4Q08 figure suggest deeper recession for this year, which is expected to be driven by the sharp drop of industrial exports, while the contribution of domestic demand would not be able to offset this. The economy downturn is expected to be the deepest in the first half of the year.
Consumer prices increased by 0.6% m/m in January. Thus, the 12-month inflation rate further slowed to 3.1% (from the 3.5% published for December 2008). Thus, the mid-term inflation goal of 3% y/y was practically reached in January. Food and services prices rose above the average last month (2.2% and 0.9% m/m, respectively). There was a decline on monthly level in clothes and fuel prices, however. Prices of durables increased by 0.5% m/m, which could be explained by the forint weakening. The seasonally-adjusted core inflation rose just 0.1% m/m. Thus, the 12- month core rate also slowed, to 3.4% from 3.8% y/y, seen in December.
The above figures suggest the continuation of the rate cutting cycle of the CB. We think however that the current rate cutting cycle will decelerate and no rate change expected at the February rate setting meeting. The reason is the vulnerability and the increased volatility of the forint exchange rate. In the current market environment, thanks to the exchange rate factor, too fast rate cuts could jeopardize the country’s financial stability.
