Recently published foreign trade data confirm that Hungary’s economic recovery continues to rely on strong external demand. The country posted a record-high trade surplus in November, with export growth (20.2% y/y) outpacing import growth (18.3%). The divergence between export and import growth reflects both robust demand in the eurozone, which absorbed 78% of total Hungarian exports, and anemic domestic demand. Exports to Germany, which consist primarily of intermediate goods, accounted for more than one-quarter of total exports in the first 10 months of 2010.

Imports and exports usually move in tandem, reflecting the high import composition of Hungarian exports. However, November import growth showed signs of stagnation, indicating sluggish domestic economic conditions.

Real Loan Growth to the Private Sector (y/y)

Source: Magyar Nemzeti Bank, RGE calculations

Tight credit conditions and impaired household balance sheets stand out as the two main reasons behind the sluggish domestic economic activity. A new “crisis tax” imposed on Hungarian banks in mid-2010 further reduced already suppressed lending, and real credit growth to the private sector plunged back into the negative territory in the following months.

Meanwhile, Hungarian households, which have engaged heavily in foreign currency borrowing, are feeling the heat of negative currency effects. Around 60% of the housing and consumer loan stock is denominated in Swiss francs (CHF). Since the beginning of 2010, the Hungarian forint has depreciated 20.1% against the CHF, which has raised debt burdens in local currency terms and pushed the rate of non-performing loans (as a percentage of total loans) into double digits.

Exchange rate volatility has also triggered calls for banks to allow the conversion of CHF-denominated household loans into euro-based loans. On the whole, given the subdued domestic demand outlook, net exports will continue to serve as the main growth driver in the months ahead. (See related Critical Issue on Hungary’s economy.)

Editor’s Note: This post is excerpted from a much longer analysis available exclusively to RGE Clients: Europe Focus: EU Crisis Strategy; German GDP; UK Inflation; Hungarian Exports