Not even the official prices are holding back inflation, which is largely driven by the rise in food prices, mostly due to the drastic rise in energy prices, explained Dávid Németh, senior analyst at K&H.
Inflation is over 21 percent, and according to K&H’s leading analyst, it will peak at around 22 percent at the end of the year, where it will remain at the beginning of next year. The gradual slowdown may begin in the first half of 2023, and he expects inflation to return to single digits next fall. Inflation may average around 14.3 percent this year, which may be similar next year as well. A big question is how the labor market will react to this, which is still tight in Hungary, where there are few easily recruited workers.
According to Dávid Németh, high wage dynamics are expected, despite this, net real wages will decrease. All of this may lead to a decline in household consumption, the contraction may be 4-5 percent.
Food accounts for 33 percent of the total spending of the lowest-income households, electricity adds 13 percent, and additional costs of housing maintenance represent another 8-10 percent. Next year, these costs may rise to over 60 percent, so households will have less money left for services. Therefore, the demand for them can fall quickly and quickly.
According to Dávid Németh, we are close to recession, next year the Hungarian economy will teeter on the edge of stagnation, the speed of recovery will be a question, growth dynamics of 3-3.5 percent can only return in 2024.
Hungary’s Achilles’ heel is currently the deficit of the current account, the GDP ratio could drop by 8 percent this year, and this could be halved in 2023. At the same time, this year’s forecast is considered high, especially in a regional comparison, while the budget balance roughly corresponds to regional levels. The leading analyst expects an improvement because the government policy strives for consolidation. The budget deficit may decrease to 3.8 percent, which may improve the current account balance. In addition, the corporate and household sectors are expected to adapt, the population will be more cautious and will focus on saving. The arrival of EU funds is expected to finance the remaining current account deficit, which will lead to the strengthening of the forint in the first half of next year. Thus, the Hungarian currency may temporarily strengthen to 380-390 forints against the euro. In the second half of the year, when the Hungarian National Bank is expected to start reducing the base rate, the forint may stabilize in the 390-400 range.
Challenges for businesses
“Due to the drastic change in the macroeconomic environment, it is no longer enough to intervene at a few points and reduce costs,” pointed out Hans Dewachter, the chief economist of the KBC Group, and then highlighted: “There is a need for a complete rethinking and simplification in terms of energy consumption, supply chains and production technologies. is necessary, while climate protection must also be integrated into the operations of companies with greater weight and at a strategic level.”
Gábor Rajnai, head of K&H’s business clients division, mentioned that while it was enough to digitize some or partial processes during the coronavirus epidemic, value chains, entire production chains, and energy consumption must be reconsidered in light of the current challenges.
During the pandemic, the disruption of supply chains and the shortage of raw materials began, which was later followed by the energy crisis with the Russian-Ukrainian war. The combination of these has caused an inflationary pressure that is currently reflected in a drop in real wages in the Hungarian corporate sector, and this also poses a significant challenge. In addition to all this, he also mentioned the drought caused by extreme weather, which pointed out that climate protection must now be dealt with at a strategic level.
In addition to exchange rate fluctuations, this year, as a novelty, we had to face a drastic increase in interest costs. Those who covered their interest costs related to the loan on time could save up to HUF 300 million in interest over the entire term in the case of a HUF one billion, 5-year loan.
The expectations of large companies are negative
At the press conference, Gábor Rajnai also presented the results of the research of the K&H large company growth index, which give an idea of the opinion of 200 large Hungarian companies regarding the future. The expectations of large companies are currently the most negative in eight years, the indicator fell to -15 points in the third quarter. Among the corporate and macro index, the latter indicates the greater fall. So companies are much more optimistic about their own situation than about the situation of the Hungarian economy. The most pessimistic is the trade sector, while industry is less negative, and surprisingly, it is not the service sector where certain companies are significantly affected. Geographically, companies in Western Hungary are relatively more optimistic, while those in Central and Eastern Hungary have an unfavorable picture.
It is interesting how the perception of companies has changed regarding the movement of the forint exchange rate. Previously, one-third to one-fourth of the companies judged the Hungarian currency to be deteriorating, now the proportion of those where the fluctuation worsens the prospects of the companies has increased drastically.
This ratio of over 70 percent may be surprising, since a significant number of companies export, and one might think that the weakening forint means a plus for them. At the same time, it can be seen that this level of fluctuation causes unpredictability for companies, which is difficult for them to manage.
In practice, exchange rate movements cause increasing operating costs, primarily for raw materials, as well as wage costs. An important effect is that some companies find it difficult to find qualified workers, for example in the IT sector. In order to mitigate exchange rate risks, companies primarily enter into hedging transactions, more recently they reduce the validity period of price offers, and offer prices in euros.
The companies are characterized by positivity in one respect
Regarding employment, companies think positively: only 6 percent expect that the number of employees will decrease, 13 percent still expect an increase in the number of employees, and 81 percent plan to keep the number of employees unchanged.
(Cover photo: A small business owner working in a nail salon and his guest on April 3, 2020. Photo: Christian Petersen / Getty Images)