Retail Trade Seems Likely to Drop Further

Analysis

Hungary’s retail sector is still in decline, with the August data proving to be even weaker than expected. With the gradual slowdown of the inflation rate, analysts thought domestic consumption would pick up from the previous month, but instead, it contracted further. This is not likely to change until real wages start to increase.

The volume of retail trade declined by 7%, according to raw data, and by 7.1% when adjusted for calendar effects in August. Sales revenue rose by 7.8% to HUF 1,594 trillion due to high inflation. Compared to the previous month, retail turnover decreased by 0.5%. In the first eight months, the volume of retail trade decreased by 9.6%, according to the fresh data released by the Central Statistical Office (KSH) on Oct. 4.

The volume of sales decreased by 4% in specialized and non-specialized food retailing year-on-year in August. The volume decreased by 4.2% in non-specialized food and beverages stores (accounting for 75% of food retailing) and 3.4% in specialized food, beverage and tobacco stores.

The turnover of non-food retailing decreased by a total of 5.2% in volume in August compared to the same period of last year. Sales volumes rose by 4.8% in pharmaceutical, medical goods and cosmetics shops. In comparison, sales volumes decreased by 1% in second-hand goods shops, by 6% in books, computer equipment and other specialized stores, by 7.8% in textiles, clothing and footwear shops, by 11% in non-specialized shops dealing in manufactured goods and by 15% in furniture and electrical goods stores.

The volume of mail order and internet retailing, accounting for 7.3% of all retail sales and involving a wide range of goods, was essentially unchanged. The sales volume in automotive fuel stations was 18.1% down compared to the same month last year. Sales in motor vehicles and motor vehicle parts and accessories stores not belonging to retail data were essentially unchanged.

According to Gergely Suppan, head analyst at MBH Bank Nyrt., the significant drop in retail sales in the spring months, in addition to the high base caused by the personal income tax refund and last year’s six-month gun money payments, is caused by the exceptionally high (albeit decreasing) inflation and the significant increase in household energy prices for households with higher than average consumption.

Lagging Effects

The decline in the turnover of food stores is still substantial but is getting milder. More conscious and cautious purchases are reflected by the fact that sales growth in retail stores lags behind wage dynamics and that volume declines lag behind the decline in real wages.

That suggests that households are increasing their savings, as evidenced by household financial accounts or spending on other services, says Suppan. He believes one-off base effects also helped cause the notable drop in retail sales.

As for the near future, he notes that, for the rest of the year, due to the ever-lower base, the rate of decline in the retail sector may gradually ease and that it has already passed the low point.

“Due to easing inflation and the expected turnaround in real wages in September, we can already expect a pick-up in the coming months,” he says. “The decrease on a monthly basis is what caused the negative surprise since we could have expected an increase here with the gradual slowdown of inflation,” Makronóm Institute’s head economist Gábor Regős argues.

“The year-on-year decline is not a surprise, as it resulted from the high base and the 2% drop in real earnings in July, as households spend their July wages in August.”

High Base

The high base was mainly due to the fuel price cap, which significantly increased demand: while the KSH measured a 17.9% increase in the base period, this August, it fell by 18.1%. Due to the incorporation of high prices into the base and the reduction in prices of some products, the decline in the volume of food was smaller than before but still significant at 4%, Regős points out.

The turnover of non-food stores fell by 5.2%. At the same time, the postponement of non-essential, higher-value purchases is still typical: a double-digit volume decrease was measured in the case of industrial goods and furniture and technical goods. Growth was achieved only in the case of pharmacies, where the increase in volume amounted to 4.8%, meaning that Hungarian households have money for the most necessary things. The decrease in the volume of retail trade significantly exceeds the EU average, where the rate of decline was 1.2% in July.

In the case of retail sales, on an annual basis, there will definitely be a decline in the coming months: real earnings will only start to increase from September, which will be visible for the first time in the October retail sales data.

At the same time, due to the high base caused by the fuel price cap, the volume of retail trade can only show annual growth at the end of the year or at the beginning of next year, according to Regős.

“On the other hand, on a monthly basis, we can hope for the livening of consumption since this is also a condition for a recession of only a few tenths of a percentage point to occur in the Hungarian economy this year. This now has perhaps much less of an income-related barrier than of consumer sentiment,” he adds.

This article was first published in the Budapest Business Journal print issue of October 6, 2023.

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