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Still empty baskets

Consumer spending is still deeply in crisis in Hungary, with a slow recovery expected in the fall. By then, consumers' shopping habits might be much changed.

January and February retail data raised hopes that recovery was finally on the way and thatHungarians would once more start shopping the way they used to. A March fall could have been explained away as a temporary drop, but now that the April data has arrived, and shows a turn for the worse, it is certain: domestic demand is still in crisis.

Domestic retail turnover showed a 0.5% drop in the first four months of 2011, while in April it dropped by 1.3%, according to the report lately published by Hungarian Central Statistical Office (KSH). The disappointing data is a bitter surprise for both the government and market players who were hoping that the 16% flat rate personal income tax would kick-start domestic demand. Analysts are concerned that this negative data could endanger the recovery prospects of the Hungarian economy.

Many analysts were skeptical about the stimulus effect of a lower flat tax from the start. They argued that people will rather use the extra money to increase their savings instead of spending it. Gergely Suppán, a Takarékbank analyst noted that domestic demand did not start growing this year despite the “remarkable decrease” of personal income tax. He thinks people are still very careful in their spending.

Others agree. Zoltán Árokszállási, an analystat Erste Hungary said that the April data is a “negative surprise”, as he was expecting 0.2% retail turnover growth this year. He agrees that the personal income tax decrease did not have any serious effect on domestic demand.


Retailers are also pessimistic. A Budapestbasedsupermarket’s stock manager says shehas not experienced any increase in demandsince the introduction of the 16% personalincome tax. The consumption habits of theaverage consumer have gone through a majortransformation, she added. The once-a-weekbig shopping in a hypermarket when peoplebought a huge amount of goods has decreasedradically. “Instead, people are going to smallsupermarkets or corner shops close to theirhome, and are choosing very carefully whatthey buy and for how much, and spend a lotless money per occasion than previously,” sheexplained to the Budapest Business Journal.Also, people tend to prefer basic fresh foodstuff,leaving the sales of non-essential nonperishablegoods in stagnation.

The situation in the countryside seems to bethe same or maybe even worse. “We see no reasonto believe turnover will pick up this year,”says the owner of a supermarket from the sameretail chain around Lake Balaton from the sameretail chain. He explained that while his shophad generated most of its annual income duringthe spring and summer months, this seasonalpick-up has become a lot smaller in thepast two years: his shop sells HUF 5-6 millionless in a spring month than earlier.


Growth in demand is going to be slow even if it arrives, analysts say. Árokszállási said he expects a retail turnover growth in 2011 at an estimated 1.5% followed by a 2-3% annual increase in 2012. He adds that the fall of 2011 could also bring some positive surprises.He projects retail turnover to pick up in the autumn after former private pension fund members are payed the real yields on their savings. This will be a one-time only positive effect on domestic demand, though, he points out.


However, despite the gloomy opinions, somepositive trends seem to have emerged in June.The decreasing tendency of both the complex Consumer Confidence Index (CCI) and the Consumer Expectations’ Index (CEI) beginning mid 2010, changed in June, recent research by the GfK Hungária market research institute, pointed out. The CCI showed 14 points growth, and is now at 154 points, while the CEI increased by 16 points, and is now at 187. The majority of people (59%) do not expect that the unemployment rate will grow. In the meantime, the Purchasing Willingness Index (PWI) rose, too: it has increased by 11 points and is standing now at 117.8 points.


Erste’s Árokszállási cautions that one should be careful to draw overtly optimistic conclusions from this positive data. He argues that consumer confidence is strongly dependent on changes in the Swiss franc exchange rate. The trend of increasing consumer confidence will not last if the exchange rate remains high, since its changes dramatically affect Hungarian households with Swiss-currency-denominated mortgages.

Lasting growth in consumer confidence, which would result in more spending, will only happen if the Swiss franc weakens against the forint, and stabilizes at a lowerlevel. In this case internal demand will pickup shortly, and will be followed by more shopping, Árokszállási concluded. This is very likely to happen, since the government plans to fix the exchange rate of the Swiss currency in order to protect people indebted in Swiss francs.


Retailers are also reluctant to be too optimistic about future prospects. The Budapest-based shop manager hopes government measures will start having a positive effect on demand, but does not expect retail turnover to pick up sooner than early 2012. In the meantime, not everyone is confident about the short-term success of government measures targeting economic recovery.

“The government can say whatever itwants, but the fact is that people who do not have a job, have no money to spend,” the Balaton-based shop owner said. He thinks government measures will exercise a positive effect on domestic demand only in about two years time, and expects his business to grow earliest by mid 2013.