Layoffs afoot in Hungary, tough months await the economy

A few months ago, there were as many vacancies in Hungary as there were before the Covid crisis. In fact, a new record was set in the second quarter, after the Central Statistical Office (KSH) counted 100,000 job vacancies. But the slowdown in economic growth and the onset of the energy crisis seem to be turning this situation around quickly. According to an autumn survey by GKI Economic Research, the labour shortage is now half the problem for industrial companies than it was at the end of last year.

Not only in industry, but also in the construction and services sectors, the problem seems to going away. However, in the autumn, more and more people started to complain about a lack of demand as a major constraint to growth, indicating that a recession may be getting closer. At current price levels, it is not surprising that this growth hindrance has appeared, and it is likely to remain a key factor in the months ahead.

As the Hungarian economy edges closer to a recession, labour shortages could be replaced by unemployment in the coming months. This is reflected in the latest (September) figures by the KSH, which already show a slight increase in unemployment, from a low of 3.3% to 3.8%. This is one of the first clear signs that the Hungarian economy is slowing down and that the surge in energy prices is making the operations of more and more companies unsustainable.

Of course, companies will be looking to retain workers, as they have recent memories of how difficult it is to find and retain skilled workers, but with demand falling and/or energy prices rising dramatically, it is difficult to cope. We can only repeat ourselves: these problems are making more and more companies' operations unsustainable:

• in the tourism and hospitality sector, high overheads could lead to the closure of restaurants and hotels due to the energy-intensive nature of the sector (especially in winter),
• in the manufacturing sector, the slowdown in the global economy could also put firms in a difficult position,
• the transport sector may also be forced to adjust due to the deteriorating economic situation and falling demand,
• severe problems in the construction sector could be caused by public austerity and a fall in public investment,
• and in the retail sector, soaring energy prices, the sharp rise in purchase prices, the special taxes and the price freeze could lead to more small shops than usual closing down, as demand is already falling at current price levels.

According to professional organisations, the tourism and hospitality sector is facing problems similar to those during the coronavirus crisis, although the sector had been performing well until August. The number of people working in the sector even hit a new high at the end of the summer. However, in recent weeks there have been reports that more and more hotels and restaurants are closing because operations are becoming unsustainable. Even if we are more optimistic than these organisations, and assume that not all of those closing down will sack their employees, 10,000 to 20,000 workers could still lose their jobs in the sector.

The manufacturing sector is still benefiting from strong demand, but the global economic downturn may reduce orders also for domestic factories. In addition, labour shortages in the sector are easing rapidly, while recent months have already shown a decline in employment in this sector, indicating that the situation in industry is already changing.

These firms are also taking blows from the energy crisis and rising raw material prices, while price hikes cannot remain the answer forever. If industry lays off only 1-2% of its workers during the crisis, this alone will increase unemployment by tens of thousands. But new investment in manufacturing can alleviate this problem.

Trade associations are also sounding the alarm in the construction sector following drastic cuts in public spending, which affect an array of investment projects, but the data do not yet show any signs of trouble. Meanwhile, household investment could also fall, as it is precisely this kind of spending that is cut back during recessions. A big question mark will be the home renovation subsidy, which, if abolished, will put an even sharper brake on demand. The sector employs around 170,000 people, so a meaningful wave of redundancies would also boost the jobless rate.

Retail trade performed favourably in the first half of the year, with sales up on the back of significant wage increases. But the sector is now facing a number of problems. Booming consumer prices are already constraining demand and consumption could grow even more feeble in the coming months as real earnings are expected to fall. Meanwhile, there are a growing number of measures that are weighing down on the sector, the latest being the extension of price freezes. Market analysts say this could lead to the bankruptcy or redundancies of some small shops.

All of the above could lead to a rise in the unemployment rate in Hungary in the coming months. Indeed, the lesson of the Covid crisis is that labour redundancies are mostly a last resort. However, the worsening economic situation and the surge of energy prices will not allow all workers to be retained and all businesses to survive. In the winter months, unemployment rates could easily reach 4-5%. If the economic situation deteriorates further, unemployment could be above 5% by early next year.

However, it seems that, learning from the Covid crisis - when lockdown measures immediately led to drastic layoffs - the government is also trying to help companies in the early stages of the crisis, which could lead to more modest redundancies. But some of this is only enough to prevent a rapid deterioration. Indeed, a domestic monetary policy reversal would have put a complete brake on lending and would have led to extremely high repayments for firms, which would are offset by the recent measures taken by the cabinet (extension of the interest rate freeze).

However, the introduction of the factory rescue scheme and the continued provision of cheap credit will provide substantial help to stem the tide of redundancies. The bad news is that even this is unlikely to prevent a further rise in unemployment. The good news is that the cabinet has found some spare funds in the budget to support companies. Further bailout packages may well be needed in the coming months, though.

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