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New Year Kicks off With a Positive Economic Surprise

Analysis

Despite some declines in the two main segments of Hungarian industry, the November performance of the sector exceeded analysts’ expectations, thus increasing the chance for even more favorable economic growth data in the fourth quarter of 2021.

The Central Statistical Office (KSH) said in a second reading on Jan. 12 that industrial production increased by 2.6% on a year-on-year basis last November. Based on working-day adjusted data, production rose by 2.1%. According to seasonally and working-day adjusted data, industrial output was 2.9% higher than in October 2021.

In a yearly comparison, increases were measured in the majority of the manufacturing subsections; however, the manufacture of transport equipment, representing the largest weight, dropped by 15.1%, mainly due to the global shortage in semiconductors.

The manufacture of computer, electronic and optical products, accounting for almost 12% of manufacturing, also declined by 2.1%, again due to the microchip shortage.

Takarékbank analyst Gergely Suppan said that industrial output in November grew above expectation on a yearly basis. The monthly increase was due to the fact that some automakers picked up production of new models as the shortage of microchips started to ease.

“The good performance of other sectors partially counterbalanced the decline in the automotive industry,” he explained. According to him, if it wasn’t for the shortage of semiconductors and other parts, the volume of industrial production could exceed the current level by as much as 9-12%.

External demand may also be driven by the recovering European and U.S. economies, the European Recovery Fund, and the U.S. fiscal stimulus, Suppan said.

Delayed Demand

The emergence of delayed demand and the replenishment of inventories may also help industry to recover, so Takarékbank’s analysts expect a gradual recovery in industrial production in the coming months, although the semiconductor shortage may persist for a long time to come.

Due to base effects and the deploying of new capacities, Suppan expects 10% industrial growth this year and 5-6% in 2023.

Gábor Regős, head of the macroeconomic department of economic think tank Századvég Gazdaságkutató, which is close to the government, also noted that after the downturn in previous months, the industrial performance in November was much better than expected.

KSH measured an outstanding expansion in the food industry, which may be related to looser restrictions due to the coronavirus, so compared to the previous year, hospitality did not suffer from any tightening.

Vehicle production performance has continued to be unfavorable due to a shortage of microchips, Regős emphasized, which appears to be taking a long time to resolve. The analyst also pointed out that the contribution of industry to the economic performance may have been neutral or slightly negative in the fourth quarter.

This will basically be determined by the December data, for which there is a risk of a longer-than-usual outage of vehicle production. In 2022, industry can again make a positive contribution to economic performance, especially if raw material shortages and transport difficulties are reduced.

Return to Spring

Péter Virovácz, a senior analyst at ING Bank, estimates that industry has finally made up for the summer downturn, and production levels have, by and large, returned to the levels seen in the spring.

However, the two manufacturing industries that make the most significant contribution still lag behind; the heaviest, vehicle production, is experiencing a considerable drop in production, while the electronics industry is struggling with a shortage of parts and thus declining production, he said.

On the other hand, it is particularly encouraging that other manufacturing sectors together have been able to offset the weakening of the two powerhouses, which perhaps predicts, as hoped, that the Hungarian industry as a whole will be able to show a good performance without the automotive and electronics industries.

After a weak October, the industry’s performance in November could give a healthy boost to GDP expectations for the fourth quarter, which have downgraded recently, the ING Bank economist said.

According to János Nagy, a macroeconomic analyst at Erste Bank, the positive surprise in the November data may be due to new capacities, including in the food industry, which has counterbalanced the weakening of the automotive industry.

He also noted that the KSH had carried out another significant revision of the previous data, as a result of which the base last year became lower. Looking ahead, however, the moderate performance of the automotive and related sub-sectors in November may continue to be offset by new capacity building in other sub-sectors, which will support output expansion.

The difficulties of the supply chains can be alleviated substantially from the middle of this year, after which a significant recovery of industrial exports can be expected due to the high order stock of the companies and developing capacities, the economist said.

Numbers to Watch in the Coming Weeks

December inflation data is released today (Friday, Jan. 14), and the KSH will also publish consumer price index figures for 2021 at the same time. On Jan. 25, KSH will issue statistics on November wages.

This article was first published in the Budapest Business Journal print issue of January 14, 2022.

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