According to the KSH report on Nov. 22, domestic investments were 14.9% lower than the same period last year. But look at the first three-quarters of the year, and the situation is not any better: the sector’s performance declined by 14% between January and September, the worst performance in a decade. From Q2, investments fell by 2.5% in the third quarter of 2024.
None of this came as a big surprise, as the Q3 GDP figure was also disappointing, with a 0.7% decline compared to the same period of last year, meaning that the Hungarian economy slipped into a technical recession again.
Although little is known in detail at this stage about the cause of the weakening investment data, KSH said that the most significant contributors to the sector’s decline were manufacturing, transportation, warehousing and education. The one thing that stopped the decline from being even worse was increasing investments in the energy industry.
It is most likely that the collapse of the export markets of the domestic manufacturing industry, which focuses on the automotive and battery industries, explains the poor performance in the third quarter. Weak state investment activity due to a lack of EU funds also contributed to the poor performance.
It may also be a cause for concern that the economic performance of Germany, Hungary’s largest trading partner, is still below expectations. According to data from the German statistical office, the economy of the former European Union powerhouse grew by barely 0.1%, managing to underperform even the anemic expectations of a 0.2% expansion.
Commenting on the data, ING Bank’s leading analyst, Péter Virovácz, cautioned that we can already conclude from this year’s GDP figures that there could also be problems with investments in 2025.
According to Virovácz, the picture is worrying because the data is weak even though several large investments are underway, such as the construction of Paks 2 and the battery projects of Chinese and South Korean firms. Residential investments, namely housing construction, have also been put on hold, with families proving more likely to save than spend. Perhaps only government support programs will be able to boost the desire to build houses again.
State activity is also weak, as investments worth several trillion forints have been postponed to 2025-2026, maybe even longer. Meanwhile, the missing EU funds are also holding back investments, and it is not known when they will be released; it seems that Hungary cannot count on this resource in the near future.
The uncertain tax environment may also reduce the private sector’s willingness to invest. Since company managers do not know what extra taxes they can expect, they prefer to put something aside to avoid an unpleasant surprise. That, in turn, means there is less available for investment and research and development, Virovácz says.
According to him, no significant state investment is expected to start next year due to scarce resources. At best, with increased household consumption, VAT revenues could represent an additional source for the budget, which the government could then use for investment.
The chance of further EU funds being released is still small, so no significant source can be expected from there either. In conclusion, while there may be signs that the investment decline is stopping, this is said more in hope than expectation, the analyst says.
Given all of the above, it would be a miracle for the Hungarian economy to approach the upper limit of the 3-6% growth path spoken of by Prime Minister Viktor Orbán next year. It is much more likely that it will remain at or just below the lower limit of 3%. This is also indicated by the fact that, according to the European Union’s latest forecast, the Hungarian economy will only grow by 1.8% next year. According to the ING Bank’s economic estimates, Hungary’s gross domestic product will only expand by 2.9% next year.
As already indicated, the investment performance was weak again in the third quarter: its performance was even below the low investment volume of the previous quarter, and here we can see another reason for the weak GDP data, according to Gábor Regős, head analyst at Gránit Alapkezelő. The investment volume decreased for the sixth time on a quarter-on-quarter basis.
“Two factors can be highlighted in connection with the decline in investments: on the one hand, the lack of funds due to the withholding of EU funds, which is pulling back state investments (this is seen, for example, in the education and transport and warehousing sectors), and the uncertain economic situation,” Regős said.
“The latter is primarily seen in the weak investment activity of the manufacturing industry, although the investment activity of SMEs here is also determined by the availability of EU funds, since without state (EU) support, companies are reluctant to invest: on the one hand, it is less worthwhile for them, and on the other hand, the abundance of funds in recent years has accustomed them to state subsidies,” he argued.
He added that, at the same time, the low investment activity of manufacturing is also due to the low demand; companies do not see that it would make sense to invest, as it is not clear who would buy the product produced. This also contributes to the slowdown in large-scale investments.
According to Regős, the latest data bodes poorly for the GDP figures for the coming period: low investment will restrain economic growth. He did, however, sound one hopeful note.
“Let’s add that capacity utilization is not exactly high right now, so, in principle, it [the economy] could grow even with low investment volume,” he added.
This article was first published in the Budapest Business Journal print issue of November 29, 2024.
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