Easing Microchip Shortage Could Boost Production This Year

Analysis

December industrial production data surprised analysts, and if the semi-conductor and microchip shortage eases in the coming months, the full-year performance of industry could be notable.

The alleviation of the chip shortage could already bring a significant increase in production in the industry this year, analysts have commented after seeing the latest industry report released by the Central Statistical Office (KSH) at the beginning of February.

According to the first release of December industrial output data, the volume of industrial production grew by 5.8% on a year-on-year basis. Based on working-day adjusted data, production rose by 3.6%. According to seasonally and working-day adjusted data, the output was just 0.1% lower than in November 2021.

As for the manufacturing subsectors, production decreased only in the one representing the most significant weight: the manufacture of transport equipment. The decline here was mainly caused by the fact that, due to the global semi-conductor shortage, factories were working at lower capacity or on a single shift basis, KSH said.

The manufacture of computer, electronic and optical products and food products, beverages and tobacco grew considerably.

According to seasonally and working-day adjusted indices, industrial output in December was 0.1% below the previous month’s level. In 2021 overall, the volume of production was 9.6% higher compared to 2020.

Analysts were pleased to note that the prolonged downturn in the automotive industry had been offset by the performance of sectors with a lower weight. This confirms that the expected resolution of the chip shortage from the second half of the year could bring substantial growth to the Hungarian industry this year.

Above Expectation

Takarékbank’s senior analyst Gergely Suppan thinks the growth in industrial production in December was above expectations. Chip shortages continue to dampen vehicle production, but he emphasized that this was partially offset by good performance in other sectors.

He estimated that if it was not for the shortage of semi-conductors and other components, the volume of industrial production could exceed current levels by as much as 6-8%. According to his calculations, industrial production grew by 1.5% in the fourth quarter from the third, thus contributing positively to GDP growth.

In the coming months, industrial production may return to its growth path. The semi-conductor shortage may persist, but the situation will likely gradually improve, which could cause a surge in industrial output in the second half of the year. After 9.6% last year, Takarékbank’s analysts expect a 5.5% growth in industrial production this year, due to base effects and the deployment of new capacities.

According to Gábor Regős, head of the macroeconomic unit at the Századvég Gazdaságkutató, the preliminary data on industrial production in December is a positive surprise; he had expected a slight decline on a year-on-year basis.

He attributed the better-than-expected data to two factors: the decline in vehicle production may have been smaller than in previous months, while the faster-than-expected output in other industries counterbalanced the decline.

The favorable data for December could also be a good sign for the overall performance in 2022. If the shortage of raw materials affecting vehicle production eases, it could significantly improve production. On the other hand, it also represents a risk: if the deficiency persists, it could delay economic growth this year, he noted.

Less Optimistic

ING Bank analyst Péter Virovácz voiced a less optimistic view. According to him, the fact that production practically stagnated in the last month of the year compared to November was not a surprise.

The excellent performance of the second-largest industrial sector, the electronics industry, could not bring a more robust December for the whole industry, so the decline in the automotive industry may have been even more significant than previously seen, Virovácz said. The nearly 10% increase in production last year as a whole reflects a low base in 2020 rather than a dynamic rise in 2021, he opined.

Until the global semi-conductor shortage improves substantially, industry will hardly be able to show dynamic growth, Virovácz warns. Looking ahead to this year, it is encouraging that the Hungarian industry has been relatively stable, even with the main sectors performing at a lower capacity.

If the good performance of the smaller sectors is maintained and the car industry and the electronics industry can return to the pre-crisis utilization of capacities in the second half of the year, then industrial production might show dynamic growth this year, he said.

János Nagy, a macroeconomic analyst at Erste Bank, said that he was not impressed with the preliminary data on production. However, he thinks it is a good sign that only the automotive output decreased in December; last month’s data highlights what Hungarian industry can do without the heaviest manufacturing sub-sector.

Looking ahead, January could bring growth again. As shown by the December data, the automotive industry’s subdued performance may continue to be offset by new capacities in other sub-sectors, which will support output expansion.

The difficulties of the supply chains can be alleviated substantially from the middle of the year at the earliest, after which a significant recovery of industrial exports is expected due to the high order backlog and new capacities, Nagy concludes.

Numbers to Watch in the Coming Weeks

Today, Feb. 11, the KSH sheds light on how consumer prices grew in January. The first estimate of the fourth-quarter GDP data will be out on Feb. 15. Construction figures for December and the full year 2021 will be released on the same day.

This article was first published in the Budapest Business Journal print issue of February 11, 2022.

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