"In light of recent crop estimates, 4Cast has considerably upped its projection for Hungarian GDP growth to 3.0% yr/yr for 2008, significantly above market consensus for around 2.0%, saying that there is a possibility that the final figure will come in at 4.0-5.0% in the end.4Cast also said that this “miraculous recovery" is largely an illusion, driven by a massive rise in crop yields and farming output.
Weather conditions seem favourable in other countries of the region as well and Hungary will not be the only one to receive a boost, said Gábor Ambrus, analyst at 4Cast in London.
He believes the effect will be most visible where the share of farming is high, i.e.: Ukraine and Romania, also saying that Poland slightly disqualifies as it was spared from much of the regional draught in 2007.
Hungarian GDP growth has been very sluggish over the past year as growth suffered from the fiscal adjustment and the related slump in domestic demand. Yet, fiscal policy was not the only factor to blame, economic growth in 2007 was also slowed by the spring frosts and the summer draught, which pushed farming output down by some 20% yr/yr, shaving around 0.6-08pp off the headline GDP growth rate.
The harvest of the most important crops, wheat and maize, was only around 8 million tonnes in 2007, vs. 12.7 m tonnes a year earlier and some 30% below the average yield of the preceding decade.
“This year however looks much different. The estimates of farming minister Graf and that of domestic farming associations indicate a crop output of a staggering 16mn ton, more than 43% above the average of the past decade and nearly twice as much as the output of 2007," Ambrus said.
Though farming has a relatively modest (around 4-5%) share in the Hungarian GDP, Ambrus believes such a sharp yr/yr increase in crops will have a significant impact on the headline growth rate.
He recalled 2004, when headline GDP growth was 4.8% yr/yr while excluding farming (*), the figure would have been very close to 2% yr/yr.
* Due to changing methodology and the fact that KSH uses chain linked indices to calculate the headline GDP growth rate, it is impossible to precisely filter farming out from the total. The percentage point contributions the analyst calculated here and the GDP growth rates ex farming should be viewed as rough guides.
GDP growth at 4.0-5.0% in 2008?
In light of the recent crop estimates, Ambrus has upped his 2008 GDP forecast to 3.0% yr/yr and he does not exclude the possibility hat the final figure will slip significantly higher.
“The acceleration of course is contingent on the current official crop forecasts at least partly turning true. If crops however reach the full 16mn tons as currently predicted, the Hungarian GDP growth could even stretch to 4-5% yr/yr in 2008. No doubt of course that growth ex farming will stay very sluggish, we expect a figure close to 2% yr/yr, as domestic demand is slow to recover and external demand is cooling."
Good weather, good crops all over CEE
The good weather is a regional phenomenon; other countries from Central and Eastern Europe have reported very good crop prospects as well.
“While Hungarian GDP growth will be very visibly affected given the low headline figure, other countries, especially those with a significantly high share of agriculture in GDP, may also benefit from a similarly significant GDP boost," Ambrus said.
The analyst sees Romania and Ukraine particularly exposed to this effect. (The share of Romanian agriculture in GDP is 7-8%, hence even a shy 30% increase in farming output (recall, the Hungarian forecast is for a nearly 100% yr/yr increase) may boost GDP by 2pp above expectations.)
The effect on Ukraine is even more pronounced with the agriculture having some 17-18% share in GDP. The crop estimates of UkrAgroConsult indicate a 35% increase in crops, and this could boost GDP by as much as 6pp (!) over 2008, offsetting much of the slowdown coming from other sources, Ambrus noted.
Ambrus expects the impact on the Czech growth to be “more muted" with the agriculture accounting to only around 2% of GDP. “Yet last year's 15% fall in farming output also created a favourable base for a small positive stimulus: a 30% rise in farming output would add 0.6pp to GDP growth."
Though the weight of farming is a relatively high in Poland, some 4-5%, “the fact that despite the regional draught, the crops of last year were around 20% above average, means that the overall impact of a consecutive good harvest will be relatively muted, barring of course a surge of the magnitude the Hungarian authorities expect currently".
How will food prices be affected?
A related question is how all this will affect food prices. “With the exception of Ukraine where export restrictions may keep the bulk of the benefits at home, it is clear that the 2008 crops will drag the general price level down," Ambrus said.
Yet, he does not believe the fall is likely to be a match to the rise seen over the last year, “as world demand is increasing and as severe crop shortages have been reported by some of the world's largest grain producers".
Ambrus sees farmgate prices declining from the summer but he said it is going to be just a partial compensation for the recent acceleration."
Source: Portfolio Online Financial Journal
13.05.2008