One-tenth of a percent does not sound like a lot. Still, in terms of the Hungarian population’s consumption, January’s 0.1% and February’s 0.2% year-on-year growth can almost be seen as rocketing.
Retail volume in Hungary has been shrinking since 2007, and was hit especially hard by the waves of joblessness brought in by the crisis. In the past 45 months before this, there were only three months – 2010 July, August and September – in which spending did not fall when compared to the previous year.
Hopes raised last summer were, however, dashed with a dismal Christmas season. Shopping in the last quarter, which usually brings in around a third of annual turnover, barely reached HUF 2,000 billion, 0.7% less than in the previous year.
Even at the time, though, there were signs that the situation might not be as bad as it seemed at first glance; people did actually spend more money on non-food stuff than in 2009, even if they economized on food instead. This was reinforced by spending this year, when 0.6% more was shelled out for industrial products, clothing, furniture and construction material, and drug store products in the first two months of 2011.
“These numbers show the beginning of the slow process of the consolidation of domestic demand,” Zoltán Árokszállási, analyst of Erste Bank Hungary Zrt told the Budapest Business Journal.
More spending on non-essentials
Some retailers are definitely feeling an uplift. Katalin Gillemot, external communication director of hypermarket chain Auchan said that the non-food segment has already started growing, but turnover volume has still not reached pre-crisis levels, and there was a clear growth in the food segment, too, partly due to the company’s discount strategy. Gillemot does not expect fast growth. “Households burdened with increased energy and petrol price have less financial capacities, and this is not helping the revival of domestic demand,” she added.
Small growth is evident in non-essential segments such as gardening, too. Dávid Boros, head of gardencenter-chain Oázis Kertészet said that they opened two-three shops last year, and they expect small growth or strong stagnation this year.
The rising number of mobile internet subscriptions also show signs of an increased willingness to spend. Mobile internet is a growing market, thus the number of subscriptions grew throughout the crisis, but the first three months of the year brought 72,000 new subscriptions – almost three times as many as in January-March 2009. This is an especially important segment for mobile operators, who are struggling to keep their revenues from shrinking in an otherwise saturated market. “We are watching domestic demand very carefully, as it is the source of our turnover growth,” Christopher Mattheisen, head of Hungary’s largest telecom firm Magyar Telekom said at the Budapest Business Journal’s Annual Business Forum last week.
The pull of production
The question of when and how domestic demand in Hungary would rise has been urgent ever since manufacturing started to recover from the crisis, mostly due to rising consumption in Germany, Hungary’s most important export market.
Production for export has been steadily rising by double digits (year-on-year) every month in the past year, inspiring a GDP-growth of 1.1% in 2010. The growth in manufacturing was however only accomplished with a 3.7% rise in headcount, barely 21,000 new jobs, and unemployment rocketed again to a record-high 11.5% at the beginning of 2011. For more on this, read our earlier article about employment in the manufacturing sector.
New jobs – for some
Jobs, first of all, are key to higher consumption and higher gowth. Zoltán Árokszállási stressed that this process will be slow, and domestic demand will reach the 2008 pre-crisis level only once the employment rate will grow significantly. According to Árokszállási, this could happen at the earliest by 2013-2014. Until then, he expects slow, but continuous growth. Since the unemployment rate is unlikely to drop below 10% this year, a significant growth of domestic demand cannot be expected in 2011.
In the first two months of 2011, the number of jobs in Hungary rose 0.6%, a fall in momentum compared to last year’s average of 1.5% growth. Businesses in some key areas that are dependent or partially dependent on domestic demand do seem optimistic in their hiring: hotels and restaurateurs (accommodation and food services with more than five employees) have raised staff numbers by 4.6% between last December and this February, while IT and communication firms made almost 12,000 more new jobs, a growth of 7.7%.
“These numbers represent remarkable growth even considering that these are less significant segments,” Katalin Janák, head of living conditions, labor market and education statistics department commented to the BBJ.
Recovery raises
Net incomes have also been raised in some segments. Full-time workers took home 5.8% more money last year than in 2009, with a further 7.7% rise in net income in January and February of this year. This was not only due to the introduction a 16% flat tax rate, an effective tax cut on higher salaries. Employees cost firms 0.2% more last year, and firms hiked gross wages by 10.6% this year (though this is partly due to bonuses being postponed to January – growth would have been only 4.1% without premiums and other extra pay.)
Fx debts leeching money
Also, even more money can mean there is less to spend in the case of those indebted in foreign denominated loans. As long as the budget of these households is burdened with a monthly mortgage installments 30% or even 40% higher than when they took out the loans, their spending capacity will not grow. This is puts a heavy brake on domestic demand, Árokszállási explains. And since these people took these loans for a longer period of time, their problem will not be eliminated any time soon. The effects of the fx loans will be present in the next few year, but with a decreasing intensity.
Saving, not spending
The next hurdle, the willingness to spend the extra money from the new and the old jobs, is also difficult to overcome. Zoltán Árokszállási thinks that it is too early to be overly optimistic about either domestic demand or employment. He thinks the adoption of the flat rate 16% personal income tax is not likely to catalyze domestic demand on the short term, since the extra income will most probably be added to personal savings. However on the medium term, it will have a positive effect: by 2012-2014 an increasing amount of the additional income will be spent by households. Still, even then the attitude of savings will dominate, he prognoses.
Despite all these challenges, major setbacks are not expected. Foreign demand will still be the driving force of the Hungarian economy, Árokszállási stated. The Széll Kálmán plan also has a hold-back effect on domestic demand on the short term. Overall, domestic demand will start growing now and will slowly accelerate to a healthy level of growth in the following one-two years.
(All figures above are calendar-adjusted and in HUF, when relevant.)
Written by Melinda Tünde Dóra and Anna Szaniszló
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