Industry out of Deep Water, but Investments Still Lag

Analysis

Third quarter data from various areas suggests that the worst is over, and there is finally light at the end of the tunnel for the Hungarian economy, which was heavily impacted by the crisis caused by the COVID-19 pandemic. Consumer consumption and investments, however, are yet to catch up.

The volume of industrial production grew 0.6% in October from the same month in 2019, according to a first release issued by the Central Statistical Office (KSH) at the end of November.  

Based on working-day adjusted data, production rose by 2.7%. The growth was 2.8% compared to the previous month according to seasonally- and working-day adjusted data. In September, industrial production shrank by 1% on a year-on-year basis according to working-day adjusted data.

The manufacture of transport equipment, having the largest weight, as well as the manufacture of computer, electronic and optical products increased; at the same time, production volume dropped in the majority of manufacturing subsections, including the manufacture of food products, beverages and tobacco products.

In the first 10 months of the year, production was 8.2% lower than in the same period of the previous year.

Industrial output in October, according to seasonally and working-day adjusted indices, was 2.8% above the level of the previous month, and grew by 66% compared to the nadir of April

The second estimate of Q3 GDP data was also released on December 1, showing that the Hungarian economy did better than expected in Q3, bouncing back 11.4% compared to the previous quarter.

Overall Fall

In the first three quarters overall, economic output fell by around 5.5%. Year-on-year, GDP was down 4.6% in Q3. Almost half of this came from the service sector, more than a fifth was due to declining output in the construction sector, while industry was responsible for less than a tenth of the reduction.

Within services, the hospitality sector’s output plunged by 20.9% as the pandemic impacted tourism, and logistics output dropped by 19.9%. Information and Communication Technology output rose by 5.3%.

Analysts say that with a 5.5% contraction in the first three quarters, the outlook for the last quarter of the year is more dubious. They therefore put the annual GDP shrinkage at around 6%; the government expects GDP to fall back by 6.4% for the full year, which now seems rather pessimistic.

Based on current trends, the economy is likely to fall back by 6% this year, and will bounce back to an annual growth of 3.5-4% in 2021, says Dávid Németh of K&H Bank.

Gábor Regős, head analyst at Századvég Research Institute noted that the GDP fall in the third quarter was lower than in the second quarter, so it seems that the economy has finally started to show vital signs. As coronavirus restrictions are still in place, it is likely that this year’s contraction will be around 6%; however, if restrictions persist, the decline might be bigger, he warns.

The most optimistic forecast was given by Péter Virovácz of ING Bank. He projects a recession of 5.8% for the entire year. According to him, the economy might recover by mid-2022, however, this will happen at different pace in different sectors.

Industrial Data

As for Q3 industrial production data, analysts said it shows that the industry is out of the water now and its performance might uplift fourth quarter GDP data, which might otherwise be compromised by weak investment and retail figures.

Industrial data was a positive surprise following rather disappointing retail figures, said Virovácz. The good performance of the industry is in accordance with the positive confidence and purchasing manager indices, he said. The good figures are linked to vehicle manufacturing and the electronics industry. According to him, fourth quarter GDP data might be lifted by export figures, which, this time, will be triggered by industrial production.

Gergely Suppan of Takarékbank is even more optimistic, claiming that better-than-expected Q3 industry data show that the crisis is over in this area. Stabilization of the industry might continue in the upcoming months, and it can finally show an increase in the last quarter of the year, thus contributing to Q4 GDP by 1-1,5 percentage points.

But while industrial data give reason for optimism, investment figures are not so comforting. Investment volume in Hungary fell by an annual 12% in the third quarter of 2020, KSH data shows. In a quarter-on-quarter comparison, investment volume fell by a seasonally-adjusted 2.1%. Investment volume fell in most economic sectors except one: it jumped by 98.4% in healthcare due to pandemic-related spending, KSH said.

The decline in investment volume was most apparent at companies with high headcounts, especially at foreign-owned and state-owned companies.

In the first three quarters of the year, investment volume fell by an annual 8.6%, albeit from a high base. Trade investments rose by 6.3% and investments in information technology by 3.4%, while investments in public administration edged up by 2.1%. However, investment volume in the manufacturing sector was down by 18.2%.

This article was first published in the Budapest Business Journal print issue of December 11, 2020.

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