The Hungarian economy is once again experiencing some turbulence, as evidenced by the 0.2% quarterly contraction in the second quarter. The detailed data show that agriculture and industry were the main drags on the production side. Consumption grew, which is certainly a cause for optimism, but investment remains sluggish and this won't change without business confidence and sustained demand growth.
The contribution of net exports has been positive, but it remains rather favourable for the wrong reasons: import demand is subdued, while exports are also weak, just not as much. Experts maintain their full-year GDP forecast at 1.5% for 2024 and around 3.6% for 2025 as we wait for consumer and business confidence to improve with the turn of the inventory cycle, pre-election government measures and a shift from saving to spending.
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Industry struggles as demand recovers slowly
Industrial production stagnated in July, contributing to a 6.4% year-on-year decline. Output volume is still 3.4% below the average monthly volume in 2021, and total order books at the end of July were 27% below last year's level. The recovery in external demand will be a slow and gradual process, as recent anecdotal evidence suggests that incoming FDI and manufacturers are downgrading production expectations for the coming years (to a third). Towards the end of this year, however, domestic demand may improve to the extent that at least some industrial sectors will be able to grow sustainably. But this will not be enough to save the year. Hungarian industry as a whole could be a significant drag on GDP growth in 2024.
High wage dynamics are not yet reflected in retail sales
The volume of retail sales was flat in July, bringing the adjusted figure to 2.5% year-on-year. Looking at the details, food retailing was again the main drag, with a decline of 0.7% on a monthly basis. The volume of non-food sales increased by 0.1% compared to the previous month. Within this, mail order, online and clothing store sales fell particularly sharply, while fuel sales rose by 0.4%. Continued high real wage growth and a generally strong labour market may provide some grounds for optimism. The service sector is expanding, but savings remain high. Foreign web shops also account for some of the consumption that does not show up in retail sales statistics. If inflation can be tamed further and brought back to 3-4% next year, this could help to further restore consumer confidence and thus improve the outlook for retail sales.
Hidden unemployment keeps labour market tight
The unemployment rate remained stable at 4.2% in August, while the 3-month (June-August) unemployment rate rose to 4.3%. Details show that the layoffs are likely to be among the low-paid and low-skilled, who tend to rely on seasonal jobs. However, laid-off workers can quickly find new jobs, which keeps the unemployment rate stable. With the labour market still tight, firms are likely to retain staff beyond their planned capacity, creating 'hidden' unemployment, as shown by the data on labour hoarding. Experts expect the unemployment rate to remain close to 4.2% until the end of the year.
Experts revise down the inflation path for 2024-2025
Due to the stagnation in the average price level on a monthly basis and the high base from last year, year-on-year inflation fell to 3.4% in August. The main components of core inflation also turned more favourable this month.
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