The decline in Hungary’s industrial sector and investments contributed to the 0.2% quarterly decline in economic activity in Q2, according to detailed figures by KSH. The statistics office on Tuesday confirmed the preliminary reading, which showed output rose 1.5% (chart) in annual terms and by 1.3% when adjusted to working days, bringing first-half growth to an adjusted 1.5%. Excluding the volatile agricultural sector, economic growth since 2022 has been very subdued, Portfolio observes.

In annual terms industrial output decreased by 2.4%, and within that, manufacturing decreased by 3.7% in annual terms. The sector has faced difficulties from the weakening of external demand and recently the slump in electric vehicle sales.

Services grew by 2.4% y/y and were flat on a quarterly basis, despite double-digit wage growth. The added value of the construction sector was 6.2%, but the output of agriculture fell 5.2% due to the severe drought. Investments proved to be the biggest drag on economic performance, with a 15.4% decline in April-June, which alone slowed GDP growth by 1.4pp.

Household consumption rose 4.2% year-on-year, and by 1.1% quarter-on-quarter, driven by temporary factors, such as last-minute purchases before the end of price caps on certain goods, while public consumption fell for the third straight quarter annually.

The net export contribution to GDP growth remained positive but was mainly due to weak domestic demand rather than strong export performance. The strong surplus in the balance of services, helped by tourism, offset the weaker export data in the trade of goods.

The quarterly performance of the Hungarian economy was the weakest in the EU after Latvia and Sweden.

 

Looking ahead, further improvement in consumer confidence and spending is needed for a sustained recovery of the economy, although inflationary pressures and weak business confidence may hinder this, ING Bank said in a note. The government's new housing programme could give a boost to the construction sector, however, a significant turnaround in investment is not expected and the severe drought could negatively impact agricultural output and food exports as well, it added.

Weak external demand for Hungary’s export-oriented industry will remain a challenge and the sector will likely contribute negatively to GDP in the coming quarters, according to analysts.

Given these factors, most economists see the government’s revised 2% growth target, slashed from 4% in the spring, as overly ambitious. ING projects the economy to grow by just 1.5% in 2024, a modest recovery from last year’s recession.