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QUARTERLY REPORT ON INFLATION MAY 2006

QUARTERLY REPORT ON INFLATION MAY 2006

MAGYAR NEMZETI BANKChart

MAGYAR NEMZETI BANKChart 2-3New orders in manufacturing and German goodsexports2000 = 1001251201151101051009590EUR millions75,000May 00Sep. 00Jan. 01May 01Sep. 01Jan. 02May 02Sep. 02Jan. 03May 03Sep. 03Jan. 04May 04Sep. 04Jan. 05May 05Sep. 05Jan. 06German new manufacturing ordersEurozone manufacturing new ordersGerman merchandise export (right-hand scale)70,00065,00060,00055,00050,00045,00040,000growth last year, euro area economic growth may reach or exceed theapproximately 2 per cent level of the area’s potential growth in 2006.However, both the IMF and the European Central Bank (ECB)emphasised that the source of the European upswing is the favourableinternational environment, and there are risks that this favourableenvironment might not continue to exist. 2Meanwhile, domesticdemand – particularly in Germany – may remain subdued. During theprojection period, the upswing in domestic demand may also be hinderedby the expectedly high energy prices and the VAT increases inGermany in 2007.The sustainability of the recovery is also questioned by the latest forecastof the European Commission, as its April projection for 2006moved clearly downwards compared to the March projection. Thisshift is also notable, because the dynamic factor model applied in theCommission’s forecasts since January this year takes into account asmuch and as current information on economic activity as possible.However, one must also not disregard that the Commission’s currentprojection for 2006 is still in line with the 2006 projections of the IMFand the ECB.Table 2-1International economic activity projectionsActual forecast, annual change Change w.r.t last forecast Publication of new forecast and(per cent) (ppoints) previous forecast2006 2007 2006 2007Eurozone growth of GDPECB 1.7–2.5 1.5–2.5 0.2 0.1 March 2006–December 2005IMF* 2 1.9 0.2 –0.2 March 2006–September 2005European April 2006–March 20061.7–2.7 n.a. –0.1 n.a.Commission**Hungarian external demand (GDP-based)IMF* 2.5 2.3 0.3 n.a. March 2006–September 2005Hungarian external demand (import-based)IMF* 5.8 5.1 0.9 n.a. March 2006–September 2005* IMF World Economic Outlook, April 2006.** The annual growth rate is the MNB’s own estimate, as the European Commission publishes monthly growth rates.2One of the most important risk factors, which is also discussed in detail by the IMF, is a possible correction of global imbalances. On the one hand, thismay hinder international economic growth, and on the other hand, through the appreciation of the euro against the dollar, it may also entail a deteriorationof the foreign trade price competitiveness for the euro area. See: IMF World Economic Outlook, April 2006.22QUARTERLY REPORT ON INFLATIONMAY 2006

INFLATION AND ITS DETERMINING FACTORSIndustrial activity – robust production and salesIndustrial output growth in 2005 H2 was very dynamic,continuing on in 2006 Q1 as well. As before, output growthis primarily determined by developments in manufacturing.The picture of robust growth is also strengthened by theinformation on sales: both exports and domestic salesincreased rapidly, which corresponds well with otherpieces of information on buoyant economic activity in foreignmarkets.However, the structure of growth seems to have changedslightly, compared to what was outlined in the previousReport. While the machinery and equipment industry’scontribution to growth declined gradually around the middleof last year, in line with the improving perception of foreignmarkets the branches of the machinery and equipmentindustry once again made a stronger contributionstarting from Q3.Growth in value added conformed with output side developments.In manufacturing, the annual growth rate of valueadded accelerated from 5.5 per cent in Q2 to around 8 percent by the end of the year. In the case of market servicesno significant change was registered in the second half ofthe year, and the annual growth rate was in the range of5–5.5 per cent.Chart 2-4Production and sales in manufacturing(annual trend growth rates)Per cent2520151050-5Per cent2501 Q101 Q201 Q301 Q402 Q102 Q202 Q302 Q403 Q103 Q203 Q303 Q404 Q104 Q204 Q304 Q405 Q105 Q205 Q305 Q406 Q1Domestic sales Export sales ProductionThe information on strong corporate activity is confirmedby foreign trade goods turnover statistics as well: since theNovember Report dynamic growth has been observed inthe value of foreign trade. The trade balance remained relativelystable, due possibly to a further deterioration interms of trade and the fact that the volume of exports grewfaster than the volume of imports. The yearly growth rate ofexports volumes peaked at 17%, while imports growth waslower (12.5%) in the first two months of 2006. Meanwhile,20151050-5Chart 2-5Industrial output – sectoral contributions to growth*Per cent543210-1-2Jan. 04Feb.Mar.Apr.MayJuneJulyAug.Sep.Oct.Nov.Dec.Jan. 05Feb.Mar.Apr.May.JuneJulyAug.Sep.Oct.Nov.Dec.Jan. 06Feb.Food industryBase materialsTotal industry”Light” industryMachinery* Based on trend annualised month-on-month indices.Chemical industryEnergythe terms of trade deteriorated nearly 3% compared toJanuary-February of the previous year. Based on the latestdata, with regard to the change in the terms of trade it isclear that most of the deterioration experienced in 2005was attributable to the increase in energy prices.Chart 2-6Exports and imports volume of goods1801601401201008060402000=100Jan. 96June 96Nov. 96Apr. 97Sep. 97Feb. 98July 98Dec. 98May 99Oct. 99Mar. 00Aug. 00Jan. 01June 01Nov. 01Apr. 02Sep. 02Feb. 03July 03Dec. 03May 04Oct. 04Mar. 05Aug. 05Jan. 06Exports trendChart 2-7Terms of trade in goods10910710510310199979593Q1 2000 = 12000=100180160140120100806040Imports trend96 Q196 Q397 Q197 Q398 Q198 Q399 Q199 Q300 Q100 Q301 Q101 Q302 Q102 Q303 Q103 Q304 Q104 Q305 Q105 Q3Terms of tradeQ1 2000 = 110910710510310199979593Terms of trade energy excl.QUARTERLY REPORT ON INFLATIONMAY 2006 23

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