Clouded Prospects, Improving Business Environment?

Analysis

DUIHK president András Sávos and finance minister Mihály Varga.

Photo by Nóra Halász / DUIHK.

With the fall update of the business sentiment survey of the German-Hungarian Chamber of Industry and Commerce (DUIHK) due to start on October 4, the Budapest Business Journal asked Dirk Wölfer, the chamber’s head of communications, to review the findings from earlier this year.

The business sentiment of German companies in Hungary are suffering from the negative impacts of the war in Ukraine and disruptions in international supply chains, according to the latest corporate survey of DUIHK members.

Given the outstanding role German businesses play in the Hungarian economy, Hungarian Minister of Finance Mihály Varga attended the official presentation of the survey results in the early summer and commented on the findings. 

The annual sentiment survey, first launched back in 1994, not only features data on business expectations and investment plans, but also looks into the assessment of the regulatory framework, labor market trends and risk factors for the companies’ business outlook.  

Compared to 2021, German companies saw their business situation and that of the economy as a whole in a better shape, but the outlook for the upcoming 12 months had dropped sharply. Nonetheless, a slight majority still expected improved results this year; even regarding employment and investments plans, the balance of sentiments was still slightly positive. 

This is an important signal to Hungary, given the strong presence of German companies in the country. According to DUIHK president András Sávos, there are about 2,700 such firms operating in Hungary, employing more than 220,000 people and contributing nearly one sixth of the gross value added in the private economy.

Finance minister Mihály Varga noted that German-Hungarian economic relations have proved “crisis-resilient,” adding that their quality has been raised successively in recent years. These ties are ever more characterized by cooperation in areas such as research and development, innovation and higher education and vocational training, in addition to production, Varga said.

The DUIHK survey again certified that tight labor markets remain a crucial issue for companies: two out of three managers are unhappy with the situation. This, on the other side, adds to existing wage pressures. This year, companies expect labour costs to rise by 10% on average – the highest forecast ever measured in the survey. But given rampant inflation and the fact that previous forecasts used to underestimate reality, the final rise in wages could be even higher, the Chamber warned. Although it provides no comfort, it is noteworthy that these labor market tensions are not specifically Hungarian problems, but affect many countries in the region.

With regards to the quality of the general business environment, the new poll saw some further improvements, thus extending positive trends of recent years. The finance minister - who has just taken up this post for the fifth time - was probably particularly pleased to see that the assessment of the tax system has continued to improve, satisfaction in Hungary exceeds the average of the Central and Eastern European region. Similarly, to the state quality of public infrastructure, conditions for research and development received better ratings than in many other countries of the region. In contrast, the surveyed companies in Hungary are clearly dissatisfied with the transparency of public procurement, and with the containment of corruptions: more than half of the respondents had negative opinions which is even poorer than the regional average. 

Impacts of global developments

Current crises in Europe and in the global economy have a severe impact on open economies such as Hungary or Germany. According to the poll, the key risk these days is surging energy and raw material prices – three out of four companies named this among the most important threats – thus outpacing even the labour shortage which ranked “only” third. In the light of latest developments, it does not surprise that the exchange rate volatility is of rising concern to the managers. As a result, two thirds of them would now vote in favour of introducing the Euro in Hungary – a jump by about 10 percentage points from last year. However, the finance minister dampened such hopes when asked: “Good economic policy can be made both with and without the euro”, he said.

An interesting detail of the survey was that disruptions of international supply and value-chains which emerged since the outbreak of the corona pandemic could even generate a chance for Hungary. Many companies are looking or may look out for new suppliers in order make their supplier network more divers and resilient to shocks. When asked in which regions they would search for new partners, clearly the Central and Eastern European EU member states were named as preferred target area.

This could even give an additional impetus to further investments of German companies in Hungary. Commenting on the fact that 88% of the survey respondents stated they would again choose Hungary as an investment location, the finance minister said: “We are working on getting to 100%.”

Talking about the current challenges facing Hungary’s economic policy, Varga named inflation and the resulting rise in interest rates and yields, which makes financing more expensive not only for the state but also for companies. Hungary must therefore pursue a stable and disciplined fiscal policy, Varga said, forecasting that the budget deficit should fall to 4.9% of GDP this year and to 3.5% in in 2023, while economic growth could reach around 4% in 2022.

The full survey results can be downloaded from the Chambers website in Hungarian or German:

https://www.ahkungarn.hu/konjunktur

This article was first published in the Budapest Business Journal print issue of October 7, 2022.

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