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Industry Still Suffering from High Energy Prices

Analysis

The Hungarian industrial sector showed weak performance at the beginning of the year, and the latest data confirms that it was not able to bounce back as previously expected.

In February, the volume of industrial production declined by 4.6% on a year-on-year basis. According to the first estimate by the Central Statistical Office (KSH), the working day-adjusted index equals the non-adjusted one. When it comes to seasonally and working-day adjusted data, industrial output was 0.3% higher than in January 2023.

The majority of manufacturing subsections contributed to the production decline. Of the subsections having the most significant weight, the manufacture of electrical equipment grew at the highest rate, but the manufacture of transport equipment increased, too. At the same time, the volume of production fell in the manufacture of computer, electronic and optical products, as well as in that of food, beverages and tobacco products.

Although industrial output in February – according to seasonally and working-day adjusted indices – was 0.3% above the level of the previous month, in the first two months of the year, production was 2.4% lower than in the same period of 2022.

Analysts were disappointed by the fresh data. Gergely Suppan, head analyst at Magyar Bankholding, said the data was way below expectations. Although there was some increase on a month-on-month basis, for the time being, the rebound expected after the January downturn has not materialized. That still indicates that the production of some sectors may have been restrained due to high energy prices, Suppan says.

The stagnation of industrial production experienced from the beginning of the fourth quarter of 2022 was caused mainly by the reduction or stoppage of production in energy-intensive sectors as a result of the explosion of energy prices. November’s problems related to oil refining also worsened the industrial performance of the industry, he believes.

According to him, in some sectors, especially the food industry, weakening internal demand may lead to more subdued production. Due to the lower energy consumption (partly caused by the mild winter weather and partly by the forced energy saving), industrial production may also have been dragged down by the decline in the production of the energy-producing sectors.

Historical Peak

Suppan pointed out that, by October 2020, industrial production had fully recovered from the crisis caused by the pandemic; however, further notable growth was halted by the lack of microchips, so industrial production fluctuated close to the pre-epidemic level, slightly exceeding it, from which it gained a definite momentum from the beginning of last year. In September, it reached a new historical peak and then fell again. Compared to the 2015 average, industrial production increased by 20.4%. It exceeded the 2010 average production level by 47.2%.

The head analyst recalls that production volume expanded significantly in vehicle manufacturing and electrical equipment production. In October 2020, the output of automakers had already exceeded the pre-pandemic level, but was, on average, 20% behind the year before, reducing the volume of industrial production by about five or six percentage points, Suppan says. He adds that new orders in the vehicle industry fell by 1%, while its order book in January exceeded the level of a year ago by 5.6%.

In the last two years, due to limited supply capacities, auto manufacturers have mainly fulfilled orders for more expensive models with higher profit margins; however, the sub-sector has shown significant improvement since the second half of last year, and some players have predicted the full recovery of supply chains, due to which a new peak was reached in December last year in domestic vehicle production.

The war in Ukraine and the energy crisis significantly worsened the prospects last year. Still, in recent months, they have already shown a significant improvement, as there is no need to fear a power shortage for the time being. European economies have avoided an acute energy crisis, and energy prices have fallen significantly to the levels of the end of last summer, he explained.

Domestic industrial order books continue to show growth, exceeding the level of a year ago by about 3.4%, so the easement of supplier problems and energy prices may result in further recovery, Suppan said of the sector’s prospects.

The performance of the sector has now declined for the second consecutive month on an annual basis, Gábor Regős, head economist at Makronóm Intézet, confirms. According to him, several factors may have played a role in the decline. The energy crisis makes it impossible for many, primarily smaller businesses, to operate, which in turn reduces the competitiveness of Hungarian industry as a whole, he says.

“On the other hand, runaway inflation can cause problems, especially in the case of the food industry: in addition to high prices, demand moderates, so this reduces the sector’s production. This can be exacerbated by efficiency problems,” Regős said.

Based on today’s data, it is likely that industry will not be able to contribute to the economic expansion in the first quarter, so that GDP will decrease on an annual basis. Looking at the year as a whole, a significant increase in industrial output will be necessary to avoid a recession, Regős warns.

This article was first published in the Budapest Business Journal print issue of April 11, 2023.

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