Investments Continue, but Recession Seems Unavoidable


The volume of investments in Hungary continued to increase in the third quarter of the year. Analysts expect this positive tendency to continue in 2023; however, the overall economic situation does not look too rosy in the near future.

The volume of investments increased by 7.7% in the third quarter of 2022, compared to the same period of last year, significantly exceeding expectations and following a 7.8% increase year-on-year in the previous quarter. It grew by 1.9% compared to the previous quarter, according to the latest data released by the Central Statistical Office (KSH).

Construction investments (representing almost two-thirds of the performance value of the total) increased by 10%, and investments in machinery and equipment (accounting for more than one-third of the total) grew by 3.3%. Within machinery, the volume of imported machinery grew while that of domestically produced items decreased, the KSH reported.

Among enterprises with at least 50 employees, cumulatively accounting for 56% of investment output, the volume of developments grew significantly, by 10%, with developments by foreign-owned enterprises playing a prominent role. At budgetary units, which accounted for 11% of investments, the performance dropped by about one-tenth, the data reveals.

While central government bodies saw their developments decrease significantly, purchases of fixed assets by local governments slightly increased. Investment volume in other categories (enterprises with fewer than 50 employees, private entrepreneurs, non-profit enterprises, as well as households) grew by 9.5%.

Manufacturing contributed the most (by 7.6 percentage points) to the 7.7% volume increase of the national economy’s investments in Q3 2022. Investment activity also grew due to the performance of the real estate, energy, and trade sectors (by 3.2, 1.2, and 0.2 pp, respectively). At the same time, performance decreases in transportation and storage, along with agriculture, held back the volume increase, by 1.1 and 0.3 pp, in each case.

Automotive Dominance

It is not a massive surprise that the investment volume in the manufacturing industry increased, as investments related to battery production and the automotive sector have ruled the domestic market this year.

Approximately 60% of the HUF 4.9 trillion total working capital investment announced was made up of a single project related to the battery market, CATL’s HUF 2.9 tln (EUR 7.3 billion) greenfield development in Debrecen. In addition, at least a further 10 investments worth hundreds of billions of forints have been underway since 2017, a significant part of which is also related to the automotive industry.

SK Innovation has announced a HUF 680 bln investment in Iváncsa, LG Chem and Toray are jointly spending HUF 267 bln in Nyergesújfalu, while Samsung SDI is investing HUF 390 bln in its Göd factory, just to mention a few.

It is also favorable news that BMW has doubled down and increased the total investment amount of its factory in Debrecen to EUR 2 bln and that Mercedes has announced another HUF 400 bln and Audi HUF 120 bln in investments, notes Gergely Suppan, head analyst at Magyar Bankholding.

An unprecedented volume of working capital investment has been announced this year, well in excess of HUF 4.9 tln, following last year’s record working capital investment of HUF 2 tln (EUR 5.9 bln), he summarizes.

Thus, the significant expansion of investments in the manufacturing industry could continue, of which capital from the Far East, primarily from South Korea and China, had already become dominant, and Japanese and Indian companies had also announced significant investments, says Suppan.

Recession: Mild or Harsh?

A good year in investment indeed lies ahead, even in a significantly higher interest rate environment, according to CIB Bank senior analyst Marianna Trippon. However, the economy is likely to stagnate next year, paired with a decline in domestic consumption, she warns.

The main question for the global economy in the upcoming period is whether it is possible to get away with a mild recession lasting only a few quarters and whether this will be enough to curb inflation, says Trippon. According to the economist, disinflation will be very slow next year, and overall inflation rates will remain high. At the same time, a temporary decline is inevitable in the United States and the eurozone. Global growth is slowing to 1.5%, a fact in which China’s economic problems also play a role.

Due to inflationary challenges, the tightening policy of the central banks of developed countries is expected to continue well into 2023. The Fed’s interest rate hike may peak at around 5%, while the tightening cycle at the European Central Bank might stop at 2.5-3%, according to the CIB analyst.

As for the outlook for the Hungarian economy, it may well be characterized by stagnation in 2023. The inflationary pressure will moderate from the middle of the year, while the labor market situation will deteriorate slightly. CIB Bank’s experts expect that the government will reach an agreement with the European Union on areas of dispute over the rule of law and transparency and corruption concerns so that EU funds will be available again next year.

Altogether, CIB Bank’s forecast has deteriorated significantly since May; the economic growth forecast has decreased, while the inflation forecast has increased.

Numbers to Watch in the Coming Weeks

On Monday, December 5, the Central Statistical Office (KSH) will release October’s retail trade data. The first estimate of October industrial production will follow on December 7. The following day, KSH will publish the November inflation figure and also the October data on the external trade in goods.

This article was first published in the Budapest Business Journal print issue of December 2, 2022.

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