Hungary's Economy: A Glimmer of Hope Amidst Uncertainty

The Hungarian economy, having recently weathered a technical recession, shows tentative signs of recovery in the fourth quarter of 2024. Preliminary data from the Hungarian Central Statistical Office (HCSO) paints a mixed picture, with some sectors exhibiting growth while others lag behind. This cautious optimism is tempered by lingering concerns about underlying economic fundamentals and external factors.

Retail Sales: A Month-on-Month Rebound

September's retail sales figures initially caused alarm, revealing a significant decline. However, October's data offered a more reassuring picture, indicating a 1.2% month-on-month rise in sales volumes. This rebound, potentially driven by a correction after the September flood situation, helped boost the year-on-year index to 3.6% (calendar adjusted). Food retailing, in particular, witnessed strong growth (1.6% month-on-month), while non-food stores struggled, experiencing a decline of 0.7%. This suggests a shift in consumer spending towards experiences rather than material goods. While the October numbers present a modest improvement, overall retail sales remain stuck at the average levels of 2021, underscoring the fragility of the recovery. Despite the positive October figures, the underlying picture for the retail sector remains subdued, essentially stagnating around the average performance level of three years ago since the start of the year. This suggests that household consumption patterns haven't significantly changed, favoring experiences over physical purchases. The fact that retail sales are not benefiting from overall consumption growth indicates deeper structural issues.

Fuel Sales and Online Shopping

Fuel sales, significantly impacted by the floods in September, saw a recovery in October, rising by 3.3% month-on-month. Online sales, however, showed a dip following September's surge, potentially indicating a return to normal patterns after a temporary boom.

Industrial Production: A Cautious Upswing

October's industrial production figures also showed improvement, with a 2.0% month-on-month growth. While this constitutes a positive surprise, the year-on-year performance remains negative (-3.1% calendar-adjusted), revealing a lingering decline. Industrial production volumes also trail behind the 2021 average by 2.6%, highlighting the subdued state of the industry. The improvement seems to be due to specific sectors, with transport equipment and electrical machinery still declining. Electronics and food sectors have expanded. This uneven growth further dampens the optimism around a sustained recovery.

External Factors and Domestic Demand

The global economic outlook, particularly concerning the European and German markets, remains uncertain. The latest German industrial data points to negative surprises, while the recent wave of factory closures and layoffs in the automotive sector casts a shadow on Hungary's short-term prospects. Export demand remains weak, and domestic consumer confidence is fragile, further limiting any potential recovery in the industrial sector. The combination of weak consumer confidence, a strong savings motive, and sluggish corporate investment points to a gloomy outlook for Hungarian industry. Next year, the industrial recovery will depend heavily on the utilization of new capacities in the automotive and related sectors. However, news on this front is not encouraging. Nevertheless, the combined October data from industrial and retail sales suggest that the technical recession might have ended as abruptly as it began.

Looking Ahead: A Balanced Perspective

The improvements seen in October's retail and industrial production figures are encouraging, hinting at a potential exit from the technical recession. However, it’s important to remember that these improvements may be due to temporary factors and do not necessarily signal a strong or sustained recovery. The underlying economic fundamentals remain weak, and uncertainty persists regarding household spending habits and the impact of external factors. The expected high real wage growth in 2025 and substantial government bond redemptions might boost the economy, but much depends on how this increased liquidity is deployed. The HUF3,000bn in principal and interest payments on government bonds maturing next year and further interest payments throughout the year in 2025 will have a significant impact. The challenge lies in stimulating domestic spending while managing potential capital outflow. The ongoing depreciation of the forint, coupled with low business and consumer confidence, does not currently bode well for a significant increase in consumption. The outlook for 2024 suggests a GDP growth of only around 0.5%, with Hungarian industry acting as a significant drag. The extent of the industrial recovery next year will depend largely on utilization of new capacities. The current economic climate highlights the need for a cautious outlook, tempered by hope for future growth. The path to a fully recovered economy in Hungary is far from straightforward, requiring a robust approach that balances short-term improvements with the need to address longer-term structural challenges.

Navigating the Uncertain Waters: A Call for Vigilance

The recent economic data from Hungary offers a mixed bag of news. While a technical recession may be behind us, significant challenges remain. A sustained and robust recovery requires not only addressing immediate concerns such as household spending and industrial output but also tackling longer-term structural problems that have hampered growth for years. The potential benefits of high real wage growth and substantial government bond redemptions must be weighed against the risks of capital flight and low consumer confidence. A careful and balanced approach, combining immediate action with strategic long-term planning, will be crucial for navigating the uncertain waters ahead.