Quarterly business climate indicator paints a gloomy picture for the Hungarian economy

According to the July 2024 survey results, the Quarterly Business Climate Indicator fell to 9 points, a similar reading to its October 2022 low. The uncertainty indicator stands at 42 points, up five points from April. This shows that the assessment of the situation of domestic businesses is even more uncertain than in April, but that there is a wide spread in the expectations of economic agents.

The index consists of ten components, with the largest deterioration in the assessment of expected investment activity (28-point decrease). There is also a significant decrease in the assessment of expected production level, the level of production in the last six months and expected capacity utilisation.

The balance indicator for the current business situation decreased from 38 to 31 points, and the assessment of the expected business situation decreased from 39 to 29 points.

Although business sentiment and expectations remained positive in July, they deteriorated significantly compared to April.

The indicators of the current and expected business situation are most comparable to those of January 2021, during the coronavirus pandemic, and July 2014, before that, which foreshadow negative developments.

The average capacity utilisation rate for enterprises with 20 or more employees was 79% overall in July. For small and medium-sized enterprises with 20-249 employees, the rate was 78%, while for large enterprises with 250 or more employees it was 80%. Compared to April 2024, the capacity utilisation rate for both small and medium-sized enterprises and large enterprises fell by 1 percentage point.

The Quarterly Business Climate Indicator is highest for services (27 points), 12 points for distributive trades, 6 points for construction,

and the lowest (-1 point) for processing industry.

More worryingly, although there is no change compared to the previous quarter in the case of distributive trades, the Business Climate Index fell by 16 points for the processing industry, 7 points for services, and 3 points for construction.

The Quarterly Business Climate Indicator is 10 points for wholly domestically owned enterprises and 5 points for foreign (partly) owned enterprises. This shows that the expectations of foreign (partly) owned firms are lower than those of purely domestically owned firms.

The Quarterly Business Climate Indicator is highest for non-exporting firms (24 points), 7 points for partly exporting firms and -2 points for mainly exporting firms.

According to the authors of the report, this is an exceptional situation in the 14-year history of the survey, as higher export activity is generally associated with a more positive assessment of the situation.

The pessimism of export companies is not good news either, as the second quarter 2024 GDP data already showed a seasonally adjusted decline of 0.2%. In Hungarian macro data, household consumption and industrial production have also shown signs of distress, and export data have not been bright lately. While the export surplus is at record levels, it is also important to note that it is strongly supported by a decline in imports, and in addition, recent months have also seen adverse developments in exports. It is therefore a negative development that it is precisely those companies that predominantly produce for external markets that are judging their situation as the worst.

The Quarterly Business Climate Indicator stands at 3 points for companies with 20-49 employees, 4 points for companies with 50-99 employees, 3 points for companies with 100-249 employees and 12 points for companies with more than 250 employees. Compared to the April results, there has been a decrease of 8 points for small firms with 20-49 employees, 10 points for medium-sized firms with 50-249 employees and 13 points for large firms.

The expected investment index also shows a worrying picture, with both large and small companies showing little activity. SMEs self-report no plans to invest at all, with the index close to -10.

The various economic climate indices can be useful tools for assessing the state of the economy, but they also have a number of limitations that need to be taken into account. Such indices are often based on the opinions of businesses and consumers and thus rely on subjective factors that can change rapidly in response to market sentiment or external events. In addition, these indices can sometimes give a delayed or incomplete picture of real economic developments. Nevertheless, economic sentiment indices are important indicators because they can help predict economic trends, business confidence and consumer spending perceptions. Most importantly, they reflect the external influences that market participants fear and the factors that they give greater weight to in their decisions.

Cover photo (for illustration purposes only): Getty Images