German companies are optimistic, but with some concerns
Members of the German-Hungarian Chamber of Industry and Commerce (DUIHK) are, by and large, overwhelmed by the economic shock caused by COVID-19, and their willingness to hire and invest is as high as ‘three years ago. However, this favorable business climate is overshadowed by concerns about labor shortages, rising costs and disruption of supply chains.
The mood among German-owned companies in Hungary is clearly optimistic, despite worrying news of a intensifying fourth wave of the pandemic. The DUIKH’s annual sentiment survey, which surveyed 100 member companies locally and 3,200 globally, clearly shows that the majority of companies, primarily in industry, have returned to pre-COVID production levels. As a result, optimism has once again reached all-time highs of three years ago.
Up to 43% of respondents say they plan to hire, and 44% of them are ready to increase their capital spending. Industrial factories, and more specifically exporting companies, are leading the pack in this regard. The proportion of those who find their own business situation positive is even higher, at 57% of them. Plus, one in two businesses expects it to improve over the next 12 months.
Germany remains Hungary’s most important trading partner and foreign investor, with more than 3,000 German-owned companies present in the Hungarian market.
âThe volume of Hungarian-German foreign trade has returned to what it was in 2019, as have Hungarian exports as a whole. In fact, Hungarian imports have already exceeded the levels measured before the pandemic, âsaid AndrÃ¡s SÃ¡vos, president of the chamber, during the presentation of the 2021 survey. This favorable business climate far exceeds the world average.
Some usual suspects could spoil the fun, however. Labor shortages have only ceased to be a problem temporarily, and now they are back in force. Almost 40% of respondents complained of an intensification of the labor shortage in the past year, and only 13% experienced the opposite phenomenon.
âIt could become a factor that can deteriorate the growth outlook. Therefore, DUIHK will continue to play an active role in the further modernization of training in Hungary, especially in vocational training, but also in strengthening dual higher education â, added SÃ¡vos.
Lack of skilled labor is one of the drivers of soaring labor costs, another potential bottleneck to growth. On average, an annual wage increase of nearly 8% is expected, up from 6% in the spring.
It should be noted that the companies were compensated by the government, however, thanks to tax cuts as part of a five-year wage agreement canceled in 2016. According to SÃ¡vos, attention should be paid to the impact wage costs on competitiveness during training. the next long-term deal.
The disruption of global supply chains is also causing problems in Hungary, particularly affecting production plants. However, German companies do not plan to relocate their activities, neither in Hungary nor in the world. However, new or additional suppliers are in high demand. Almost half of those questioned say they intend to seek out such partners; this figure reached 70% in the global survey.
In this respect, the position of the EWC as a whole takes on new importance. More than a third of companies are looking for new suppliers in the region to source fresh raw materials and energy sources.
Finance Minister MihÃ¡ly Varga, who also spoke during the presentation of the results, reminded his audience that the mistakes made in crisis management during the 2008 recession must not be repeated.
âAt the time, fiscal restraint was restored far too quickly, which slowed the pace of the recovery and led to further setbacks. What the government is doing right now is not pre-election spending, but rather injecting incentives into the economy as needed to restart it properly, âhe said.
Hungary’s investment rate is 27.5% of GDP and is the highest in the EU. This should help with the speed of recovery, he added.
The overall outlook is bright, not only in Hungary but across the region. Growth is expected to be 6.8% this year, according to the latest government estimates, to drop to 5% in 2022 as the economy stabilizes. In addition, it is expected that most commodity shortages are expected to disappear next year.
âCan you really call something a crisis where wages increase 8-10% per year and employment returns to its previous level within a year? Asked the minister.
As far as the risks are concerned, the government agrees with the business world that they have to deal with.
âTo keep energy prices under control, we have put in place long-term supply contracts to secure the energy supply. The labor shortage must be tackled in many ways: exploiting the reserves of the system, adopting new technologies and intensifying vocational training are just some of them. The government wants to be a partner in solving this problem, âVarga said. He added that German companies had validated the administration’s crisis management.
Inflation is another significant risk. As Dan Bucsa, Chief Economist of CEECs at UniCredit Bank, said during the presentation, the side effects of supply shocks and a more prolonged impact of supply chain bottlenecks and prices of foodstuffs are expected to keep inflation at record levels.
As a result, an inflation rate of 7-8% is forecast by UniCredit for 2022 if energy prices and supply chains do not normalize. This will not fail to force the National Bank of Hungary to further increase the base interest rate; which, according to UniCredit’s estimate, could reach the 3% mark next year.
This article first appeared in the print issue of the Budapest Business Journal on November 19, 2021.