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Industry Expands, Promising Signs on the Horizon

Analysis

There is light at the end of the tunnel, at least regarding Hungarian industrial production: it grew month-on-month, while vehicle manufacturing increased year-on-year in July. Overall production, however, has declined.

The volume of industrial production declined in July by 2.6%, year-on-year, while, based on working-day adjusted data, it fell by 2.5%, according to the latest data released by the Central Statistical Office (KSH).

Production dropped in the majority of the manufacturing subsections but, at the same time, grew in the sector carrying the most significant weight, the manufacture of transport equipment and of electrical equipment. According to seasonally and working-day adjusted data, industrial output was 2.8% higher than in June 2023.

The manufacture of transport equipment, representing 28% of the manufacturing production (having the largest weight), grew by 14.4% compared to the same month of the previous year. Motor vehicle manufacturing went up by 21%, and the manufacture of parts and accessories for motor vehicles rose by 9.2%.

The volume of industrial exports was 2.2% lower than a year earlier. Transport equipment exports, representing a 35% weight within export sales in manufacturing, grew by 15.9%, while exports in the manufacture of electrical equipment, accounting for a 14% weight, went up by 10.6%.

The domestic sales of industry fell by 11%, with manufacturing decreasing by 6.5% compared to the same month of the previous year. Within industry, manufacturing output, which accounts for a decisive share in industry (95%), declined by 2.3%, that of mining and quarrying, having a small weight, fell by 35%, and production in the energy industry (electricity, gas, steam and air conditioning supply) dropped by 21%.

For January-July 2023, compared to the same period of the previous year, industrial production decreased by 4.5%. The volume of export sales, representing 60% of all sales, declined by 0.5%, while domestic sales (accounting for 40% of all sales) fell by 16.4%.

Smaller than Expected

Of the 13 subsections of manufacturing, production decreased in eight, and to the greatest extent, by 23%, in manufacturing chemicals and chemical products. In the other five, production volume rose between 1.3% and 19.1%, mostly in the manufacture of electrical equipment; the output in the manufacture of transport equipment, considered the largest subsection, went up by 14.5%.

According to MBH Bank’s senior analyst Gergely Suppan, the decrease in industrial production was smaller than expected.

“The stagnation of industrial production experienced since the beginning of the fourth quarter of last year was mainly caused by the curtailment or shutdown of production in energy-intensive sectors as a result of the explosion of energy prices,” he wrote in a comment.

“In some sectors, especially in the food industry, weakening internal and external demand resulted in more subdued production. 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,” he added.

As for what to expect in the near future, Suppan thinks the outlook is boosted by the fact that new orders in the vehicle industry increased by 18.6% in June, while its order stock was 4.9% higher than a year ago.

“After the expected temporary fluctuations caused by the energy crisis, we expect a gradual revival in industrial production in the second half of this year, which is due to the gradual recovery of internal demand and the expected commissioning of new capacities, mainly related to battery production and the automotive industry, as well as the food, chemical, and defense industry,” Suppan said.

Fragile Performance

This year, due to the fragile performance in the first half of 2023, Suppan expects a decrease of around 2.5% in industrial production. However, from 2024, as a result of the new capacities coming up, industrial production could significantly pick up and may exceed 8% due to this year’s weak base.

Consumer prices were 16.4% higher on average in August 2023 than a year earlier. The prices of electricity, gas and other fuels, as well as motor fuels, rose significantly over the last 12 months.

In one month, compared to July 2023, consumer prices were up by 0.7% on average. Food became 0.3% more expensive, within which sugar rose by 54.6%, pork by 7.3%, poultry meat by 2.5%, buffet products by 2.3%, edible oil by 1.5% and chocolate and cocoa 1%. Flour became 11.5% more expensive, eggs 9.5%, seasonal food items (potatoes, fresh vegetables and fresh domestic and tropical fruits) were up 5%, butter 4.4%, and bread 2.3%, but milk products were 1.9% cheaper.

Motor fuel prices rose by 8.2%. Consumers paid 1.6% less for clothing and footwear and 0.3% less for electricity, gas and other fuels, within which electricity prices fell by 0.6%, while natural and manufactured gas prices were unchanged.

Another significant indicator was released on September 8, although this proved to be a bit disappointing for analysts. Inflation was slightly higher than expected at 16.4% in August. Primarily, the repeated rise in food prices may have caused the unpleasant surprise, although the previously worrisome price rise in services has slowed. Petrol prices also showed a significant increase.

According to economic portal portfolio.hu, analysts had expected a 16.2% figure for August. In the previous month, annual inflation was 17.6%.

This article was first published in the Budapest Business Journal print issue of September 22, 2023.

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