Hungary’s retail sales growth slowed slightly in March to 4.2% y/y, according to an initial estimate released by statistics office KSH on May 4.

The reading is well below the robust 6.6% expansion in February. However, in spite of the slowdown, shop turnover remains solid and has extended its recovery following a sharp slowdown in January. Retail sales in Hungary have been increasing since July 2013 on the back of rising a tightening labour market and resultant consumer confidence, and remain a vital driver for the economy.

On an unadjusted basis, retail sales in March grew 5.5% versus 6.7% in February. In specialized and non-specialized food shops, the volume of sales adjusted for calendar effects rose by 1.9%. Turnover increased 7.6% in non-food retail trade and 5% in automotive fuel retailing.

The result leaves retail sales 4.3% higher on an annual basis across the first quarter. The figures will only stoke hope that household consumption can continue to support economic expansion as investment and demand for exports reamins subdued this year.

"Consumption, fuelled by net real wage growth, [has boosted] the economy and it may remain one of the main components of GDP growth in the following quarters as well," KBC analysts note. "[T]he relative level of household consumption is still well below the equilibrium level compared to the real income."

Retail sales are being closely watched across Central Europe due to consumption's major role in economic growth over the medium term. Analysts forecast that rising employment, income tax reduction, net real wage growth - which came at 5.9% y/y in February - and low inflation will provide a strong base for household consumption in Hungary this year. 

Meanwhile, some suggest strong domestic consumption could help rekindle inflation in the coming months. At KBC they suggest continued consumption growth could help promote a slightly more hawkish attitude at the Magyar Nemzeti Bank (MNB). "The Monetary Council may moderate the base rate by ‘just’ 15bp in May, which might be followed by maximum one more cut in June," they forecast.