Yearend Industrial Data Below Expectations

Analysis

Industrial production in the last month of 2020 proved a negative surprise; however, analysts still expect notable expansion this year, mainly due to low base effects. In the meantime, the government has introduced its action plan to restart the economy.

Following an uptick in October, Hungary’s industrial output declined for the second month in a row last December. According to data released by the Central Statistical Office (KSH), the volume of industrial production in December 2020 grew by 5.8% year-on-year. Based on working-day adjusted data production rose by 1.1%.

Compared to the raw data, the significant difference is due to the fact that there were two more working days in December 2020 than in December 2019. The decrease was 2.4% compared to the previous month according to seasonally and working-day adjusted data.

The majority of manufacturing subsections contributed to the increase, the KSH said. The rate of growth accelerated in the manufacture of transport equipment (representing the largest weight), although the manufacture of food products, beverages and tobacco rose at a rate below the industrial average. The manufacture of computer, electronic and optical products declined.

As for the full year, the volume of production was 6.1% lower compared to 2019. Industrial output in December grew by 58% compared to the nadir of April.

The December data was more of a negative surprise than a positive one, analysts say. Furthermore, due to the lack of components in the automotive industry, the negative tendency was not likely to turn around in January, they say. They are agreed that the fourth quarter was weaker than the third in terms of economic performance. 

ING Bank head analyst Péter Virovácz said it was disappointing that industrial output shrank in December following the setback in November, breaking the positive tendencies of the preceding six months.

Automotive Dragging

January data will also be weakened by the automotive sector, which performed poorly at the beginning of the year; the question is whether other sectors were able to counterbalance that in the first month of 2021. Virovácz thinks industrial production might shrink for the third consecutive month.

Following the strong October data, when it seemed that industrial production had put the worst days of the crisis behind us, December was equally disappointing for Takarékbank head analyst Gergely Suppan.

He calculates that in the fourth quarter of 2020, industrial production was up 3.1% from the same period of 2019. Compared to the previous quarter, the increase was 4.3% in Q4 2020. Based on this, Takarékbank now forecasts an annual GDP fall of 4.9% in the fourth quarter and a 5.2% annual setback for the entire year.

Suppan thinks that the following months will see further stabilization of the industry; however, January is still likely to be weak, mainly due to the automotive industry facing a significant shortage of chips.

However, there could be notable expansion this year, partly due to the low base effects but also because of new capacities: annual increase might be as high as 14-16%. In April, due to the extremely low base from April 2020, expansion might reach 60%.

This year, industrial production might contribute more than three percentage points to the economic performance, which is significant growth compared to 2020, Suppan said.

On the other hand, Gábor Regős, an analyst from research institute Századvég, thought that the December industrial output was actually better than expected. He said it was a good sign that most of the sectors performed quite well, and the latest data showed that the second wave of the coronavirus pandemic had not impacted industrial production as heavily as the first.

As for 2021, he believes industrial production will expand and might be backed up by a high level of investments. A lot will depend, however, on how demand will pick up during the year.

Demand Dependent

K&H Bank head analyst Dávid Németh agrees that how this year’s industrial production performs will mainly depend on demand, and due to base effects, April and May might see outstanding expansion. Based on the latest data, industrial production might expand by 5-10% on an annual basis this year, following a more than 6% setback in 2020.

As to when the economy might fully recover, some say that the growing public debt, caused by expenditures related to the virus and the crisis, will undermine the recovery after the crisis. Having stood at 65% in 2019, by the end of 2020 Hungary’s debt ratio had increased to 80% of the annual GDP.

Others think that Hungary’s tackling of the crisis was a success story, mainly because the government has been able to save a large number of jobs since the outbreak of the pandemic. According to Prime Minister Viktor Orbán, the success is mainly due to the fact that the government “resisted the temptation to revert to a subsidy-based economy.”

Speaking at the annual opening meeting of the Hungarian Chamber of Commerce and Industry, Orbán detailed the government’s new three-phase action plan to restart the economy.

The first phase began on January 1, he said, and would conclude on April 1, with VAT on new home constructions slashed to 5%, a HUF 6 million loan for home renovations half of which is non-refundable, and the phasing in of the 13-month pension.

The government has also decided to exempt people below the age of 25 from paying any personal income tax. The aim of the home construction program is for 40,000 homes to be built each year, Orbán said.

The second phase will take place from April 1 to July 1, focusing on higher education. Minister of Finance Mihály Varga has allocated HUF 1.5 trillion for developments, Orbán said, adding “hopefully” that can go up to HUF 2 tln. Universities that indicate their intention to take part in the transformation will have enough time to take that step by April 1, he said.

The third and final phase, between July and October, will see “big developments” focusing on green energy, developing a circular economy and full digitalization.

Numbers to Watch in the Coming Weeks

On February 15, December construction figures will be released by the Central Statistical Office, followed by a flash estimate of fourth quarter GDP data on February 16.

This article was first published in the Budapest Business Journal print issue of February 12, 2021.

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