Weak Economic Prospects May be Temporary, DUIHK Survey Reveals

At the presentation of the results at the end of June, DUIHK communications director Dirk Wölfer presented some data on the relevance of foreign investments for both countries. For Germany, foreign direct investment in the 11 “new” EU-member states in Eastern Europe was higher than German FDI in China.

Some 16% (one-sixth) of total German exports are absorbed by these countries, compared to just 8% for China. In Hungary, foreign investors generate nearly half of all corporate GDP, 14% alone are linked to German investors. In the automotive sector, almost two-thirds of the value added is generated by German companies, with the remaining one-third coming from other foreign investors.

About 250 executives of DUIHK member companies and some other foreign chambers in Hungary again voiced their views on the country’s economic situation and overall investment climate. Unsurprisingly, the companies’ evaluations also reflected uncertainties in the Hungarian and European economies.

The current situation of the national economy was described as “significantly worse” than in spring 2022, and the outlook for the next 12 months is also seen as fairly weak: One in two companies expect the situation to deteriorate, while only 13% expect it to improve. However, this ratio is already noticeably better than last fall, when companies were shocked by the energy crisis, which had just peaked at that time.

Companies usually judge their own business prospects better than those of the general economy, DUIHK said. This proved true in the current survey again, although at a marginal level: the share of companies with a positive outlook equaled those with negative expectations. The last time the ratio was this negative was 10 years ago.

Investments and job Creation

On the other hand, despite this gloomy outlook, investment and employment intentions continued to show a positive balance and were even somewhat stronger than a year ago. According to the survey, this is particularly true for large, export-oriented industrial companies. DUIHK president András Sávos (whose daytime job is as vice president and head of digitalization and process optimization at Knorr-Bremse AG) interpreted this as evidence that companies see the current economic downturn as temporary.

Nevertheless, DUIHK’s report states that there are still challenges ahead. Energy prices continue to top the list, followed by the shortage of skilled workers and exchange rate risks. However, the first two, in particular, are also evident to a similar extent in many other countries in the Central and Eastern European region, where the various local German chambers conducted parallel surveys.

The survey in Hungary devoted considerable attention to the labor market. In addition to the workforce shortage, which has been a burden to companies for the last six or seven years, it also focused on labor costs.

Fueled by high inflation and the shortage of qualified personnel, survey participants expect their labor costs to rise by almost 15% this year. This is significantly more than in the simultaneous surveys in Poland, the Czech Republic, and Slovakia, for example, where the wage increase is “only” estimated at 8-10%.

According to Wölfer, Hungary still has the third lowest wage costs in the EU, meaning its cost advantage for exporting companies in particular will continue to exist for some time, even with solid wage growth.

Satisfaction Downturn

The DUIHK survey regularly evaluates the companies’ assessment of the quality of the investment environment in Hungary. To this end, the DUIHK also measures satisfaction through 20 factors that are decisive for daily operations and future investment decisions. For practically all of these factors, this year’s poll shows a slight downturn compared to 2022.

While labor market-related conditions are still viewed as appropriate by most survey participants, a 10-year-long trend of improving satisfaction with the economic policy framework came to a halt this year.

Among other areas, approval declined with the tax system (last year’s windfall taxes certainly played a role here) and the predictability of economic policy, which most likely reflects state interference in market mechanisms, such as administrative price regulations or intervention in foreign trade, the report states.

One of the critical figures to see a fall is the ratio of those who would choose Hungary as an investment location again. This dropped noticeably to 79% in this year’s survey, following record levels of 88% in the past two years. Some countries in the region see scores of 90% or more when asked this question, so there is a need for action here, the chamber notes.

DUIHK’s “Investment Climate Index,” calculated annually based on the survey results, fell this year from six to two points (on a scale of -100 to +100). As the index has reliably tracked Hungary’s economic performance in the past years, the latest value confirms many forecasts expecting GDP growth of between 0-2% this year, DUIHK argues.

The complete report can be downloaded in full from the DUIHK website in German and Hungarian at: ahkungarn.hu/konjunktur

This article was first published in the Budapest Business Journal print issue of May 5, 2023.