Hungarian Consumption Expected to Recover by 2025

Sluggish Consumption and Economic Contraction in 2023

In 2023, household consumption in Hungary remained weak, contributing to a 0.8% GDP contraction. However, the report anticipates a 1.9% growth in 2024, with a more robust recovery expected by 2025. While this recovery will still fall short of the sharp increases seen in 2016-2018, when household consumption grew by 4-5% annually, the upward trend will mark a significant improvement.

GDP Growth and Investment Challenges

Hungary’s economy is heavily reliant on consumption, as evidenced by the link between GDP growth and household spending. Approximately half of household consumption occurs in retail, which has seen sluggish growth in recent quarters. Investment levels also continue to struggle, with a 15% drop in 2022 and an expected 10% decline in 2023. Industrial production faces persistent challenges, further limiting the potential for rapid economic recovery.

E-Commerce Lag and Regulatory Issues

Despite the surge in e-commerce during the COVID-19 pandemic, Hungary’s online retail sector has lagged behind its regional peers, such as the Czech Republic and Poland. While Hungary’s e-commerce grew to a value of over HUF 1 trillion, it has not managed to transform local players into major regional competitors. There is also an ongoing issue with the lack of EU-wide regulations, particularly regarding VAT on cross-border transactions, which has allowed foreign sellers to operate without paying taxes in Hungary. This deprives the Hungarian budget of significant revenue.

High Levels of Savings

One of the surprising trends in Hungary is the high level of household savings. In real terms, Hungarian households are the second most cautious savers in Europe, just behind Switzerland. Even low-income households have managed to save, thanks to wage growth. This trend is partly attributed to the low consumer confidence levels, which discourage spending and promote savings in the hope that prices may drop further.

The Labor Market Remains Tight

The Hungarian labor market remains relatively strong, although it has begun to loosen slightly in recent months. Unemployment is holding steady at around 220,000-230,000 people, while there are nearly 70,000 job vacancies, indicating a slight easing in the tension between labor supply and demand. Employment remains high, approaching 5 million workers, while the unemployment rate, which temporarily spiked to 4.3%-4.4%, is expected to decrease further as new investments and foreign direct investment (FDI) create more job opportunities.

The Role of Foreign Labor

Hungary has also seen a sharp increase in the number of foreign workers, with around 40,000 new laborers entering the country in the past year. The majority of these workers come from Ukraine, the Philippines, and Vietnam, with a notable 110% increase in arrivals from these countries. While much of this labor force occupies low-skilled positions, there is skepticism about whether Hungary can absorb significantly more foreign workers in the near future. Experts estimate that integrating larger numbers of foreign workers will likely take 3-5 years, with the potential for up to 350,000 foreign laborers over the next decade.

Wages and Productivity

Looking ahead to 2024, experts predict that wages in the private sector will increase by around 14%, consistent with previous forecasts. However, real wage growth is expected to be around 10%, as inflation remains at 4-4.5%. This raises concerns about the sustainability of such wage increases, given that productivity growth continues to lag behind. The gap between wage growth and productivity is around 20%, which could pose long-term challenges for businesses.

Challenges for SMEs

Small and medium-sized enterprises (SMEs) in Hungary face significant productivity gaps compared to larger companies. The cost of producing the same product can be up to three times higher for SMEs than for large corporations. Despite this, SMEs must compete with large companies in terms of wages, putting additional pressure on their operations. To overcome this, SMEs need to integrate better into the supply chains of multinational companies and understand the demands of these larger businesses, including areas like generational transition, ESG (environmental, social, and governance) requirements, and strategic planning.

Conclusion

While the Hungarian economy is expected to recover gradually, with consumption picking up by 2025, significant challenges remain. Investment levels are still low, and the e-commerce sector lags behind regional competitors. However, the tight labor market and high levels of household savings provide some stability, and wage growth is expected to continue, albeit at a pace that may outstrip productivity improvements. SMEs, in particular, will need to navigate these challenges while finding ways to integrate more effectively into global supply chains.