Something very strange happened in the Hungarian trade balance

Hungary's external trade balance showed a deficit of €271 million in December, an even larger shortfall than the €188 million previously reported. This is particularly interesting given that the other months of 2023 have seen large surpluses, with the annual surplus reaching a massive €9.2 billion.

The reasons behind the spectacular turnaround after 2022 are known:

• The fall in gas imports accounts for a quarter of the rebalancing, with electricity and oil adding about 40% of the turnaround in Hungary's energy balance (More is attributable to the fall in prices and less to reduced consumption.)
• The improvement in exports accounts for about 15% of the factors in weight. This is shared equally between the manufacture of transport equipment and electrical machinery (the latter being batteries), with the other product groups showing almost no improvement.
• The biggest factor is the fall in imports, which account for over 40% of the total. Behind this is a contraction in imports for internal use, triggered by a fall in investment and consumption.

What analysts are more worried about in connection with the December data is what has changed, whether we should expect the country's external balance to deteriorate again as fast as it improved.

The short answer is that there is no need to expect a sharp deterioration in the balance, as there are no drastic shocks such as extreme energy price volatility on the horizon. In any case, December is not the month when huge surpluses in the goods account are usually built up for seasonal reasons, so surpluses of over €1 billion in previous months were not expected.

Based on today's detailed data, the unexpected deterioration in December appears to be the result of a sudden surge in import volumes, including a surge in the volume of energy imports.

In the previous months, we could get used to import volumes being on a downward trend due to weak domestic demand and energy savings, but the change in December is quite unexpected.

The sharp shift suggests for the time being that it could be a one-off effect. We speculate that several factors may have played a role at the same time: gas purchases picked up towards the end of the year, electricity imports may have surged due to reduced capacity at the Paks nuclear power plant, and Hungary may have bought more oil from Croatia to deal with contractual uncertainties.

All of this suggests, in our view, that we should not expect a rapid deterioration in Hungary's external balance. However, the slow recovery and gloomy export outlook mean that we cannot rule out a shrinkage of the trade surplus this year compared to last year.

More worryingly, today's external trade statistics show negative signs for economic growth. As the graph above shows, the country's export volumes have been on a stagnating trend for some time, and a similar picture emerges in euro terms:

In December, the export volumes of the main groups of goods, raw materials, machinery and manufactured goods were also down compared to a year earlier. This was likely driven by a deterioration in the external environment, and if this persists, one of the potential engines of growth this year could drive the economy slower than previously expected.

Imports, the other leg of the trade cycle, are not soaring either. Except for the aforementioned surge in energy imports, December volumes in all main areas were below December 2022, suggesting that the other driver, domestic demand, is not gaining momentum as hoped.

Cover photo: Getty Images