Can Battery Production Jump Start Industry?


Industrial production showed some vital signs in August, mainly due to battery manufacturing, but overall, the data fell short of expectations. Price increases were slower than expected in September, but Hungary still holds the dubious honor of leading the way regarding inflation in the European Union.

Falling short of expectations, industrial production fell by 5.3% in August, or, when adjusted for the working day effect, by 6.1%. Industrial output fell by 4.6% in the first eight months of the year.

The majority of the manufacturing subsections contributed to the production decline. Out of the subsections with the most significant weight, the manufacture of electrical equipment grew at the highest rate, but the manufacture of transport equipment also increased. Simultaneously, the volume of production fell in the manufacture of computer, electronic and optical products, as well as food products, beverages and tobacco products, according to the latest data released by the Central Statistical Office (KSH).

Based on seasonally and working day-adjusted data, industrial output decreased by 2.4% compared to the previous month, meaning it did not confirm the recovery seen in August. However, industrial production still performed better than the previous quarter, MBH Bank head analyst Gergely Suppan notes.

The data suggests that the reduction in energy prices has not yet caused an overall easing in energy-intensive sectors, whose production may have remained subdued. Compared to the average of 2015, industrial production increased by 19.1%, while it exceeded the average production level of 2010 by 45.6%, Suppan notes.

According to him, the stagnation of industrial production experienced since the beginning of Q4 2022 was primarily caused by the curtailment or shutdown of production in energy-intensive sectors as a result of the explosion of energy prices. In some sectors, especially the food industry, weakening internal and external demand resulted in more moderate production.

Lower Energy Use

Due to lower energy consumption (partly due to the mild winter weather and partly due to forced energy savings), industrial production was also dragged down by the decline in the production of the energy-producing sectors, says Suppan.

According to the latest KSH data, among those sectors with the greatest weight, the production volume increased in vehicle production and, especially, the production of electrical equipment. At the same time, it decreased in the other sub-sectors. Hence, the production of computers, electronics, optical products, as well as the production of food, beverages and tobacco products, all fell.

Suppan recalls that, when it comes to car manufacturing, there was a significant improvement from the second half of last year, as most players reported the complete recovery of their supply chains and the resolution of the previous acute shortage of chips and semiconductors. Thanks to this, the output of domestic vehicle production reached a new two-year peak last December. The backlog of orders accumulating due to missed deliveries may indicate continued favorable prospects for production, at least until it is cleared.

Such prospects are overshadowed, however, by the fact that new orders in the vehicle industry fell by 12.1% in July, compared to the high base of a year earlier, while its order book fell by 3.2% compared to 12 months ago.

As for the outlooks, after the expected temporary fluctuations caused by the energy crisis, Suppan augurs a gradual recovery in industrial production for the remainder of this year. The gradual recovery of internal demand explains this. The expected commissioning of new capacities, mainly related to battery production and the automotive industry, as well as the food, chemical and defense industries, may also support it.

Inflationary Pressure to Ease

In the meantime, inflationary pressures seem to be easing somewhat: inflation slowed to 12.2% in September from 16.4% in August. This was mainly caused by base effects, as the sharp rise in household market energy prices and the significant price rise in food prices of a year ago were not present this time.

The lower-than-expected inflation was also contributed to by a slightly more moderate than expected price increase in the cost of services. However, that was somewhat offset by further increases in fuel prices. Also indicative of easing inflationary pressure is that core inflation decreased from 15.2% in August to 13.1% in September, which also indicates an easing of inflationary pressure.

Although inflation slowed in Hungary at the beginning of the fall, prices rose only by an average of 4.9% across the European Union. The Hungarian rate of 12.2% is 2.5 times that. That means Hungary still leads the European rankings in terms of price increases, as demonstrated by the latest Eurostat data. In Romania, for example, inflation was at 9.2% in September, while Slovakia had a 9% rate.

In spite of this, Suppan expects that by the end of the year, the inflation rate in Hungary may have decreased to close to 6%. For the full 12 months, he expects average inflation of 17.8%, while 2024 may see that fall further to 3.9%, despite the increase in fuel excise duty at the beginning of next year.

This article was first published in the Budapest Business Journal print issue of October 20, 2023.


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