Economy 30 September 2024, 9:42am

It takes more than some increase in real wages for consumption to pick up - MNB analysis

Portfolio

The inflation crisis has hit low-income households hard in Hungary, where a sharp rise in food prices has led to a fall in consumption. Although real wages are set to rise by nearly 10% this year, retail sales have risen only modestly as many people prefer to save their income. According to a recent analysis by the National Bank of Hungary (MNB), higher earners have enjoyed the largest income growth, particularly through entrepreneurial income and income from savings. Real income growth for households in the lower income quintile has been much smaller, exacerbating economic inequalities. Even so, Hungary's consumption growth is still in the mid-range in a European comparison.

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A year and a half ago, Hungary entered a period of crisis in the cost of living. The inflation shock of 2022-23 has had an extreme impact on the consumption of low-income earners, whose consumption patterns have reached very high levels of food purchases. The lower one's income, the more severely one was affected by the extreme inflation, as food prices increased the most.

However, consumption has not taken off this year. Month-on-month retail sales have been virtually flat for months, but growth has been modest even on an annual basis. In the first seven months of the year, retail sales volumes rose by 2.6%, while real wages increased by almost 10%.

There are a number of explanations for why demand is so weak: one hypothesis is that people are spending part of their income abroad, or that they are buying through the cheap Chinese online store Temu, but this is not as significant a factor. "More and more people are saying that the Temu effect and foreign purchases are causing weak consumption, but this explains only a very small part of the low sales. Without the Temu effect and the pick-up in foreign shopping, retail growth would be 1% higher overall," a source familiar with retail trends told Portfolio. And this does not resolve the contradiction between real income growth of nearly 10% and retail growth of less than 3%.

A recent analysis by the National Bank of Hungary (MNB) came to a similar conclusion. "According to the data on foreign card transactions, there has been no significant change in the volume of foreign purchases, so we cannot speak of a significant increase in shopping tourism," said András Balatoni, director of the MNB last week. According to the MNB's study, "the share of purchases registered abroad decreased for both physical and online transactions, while the amount spent abroad increased as a share of total purchases".

In other words, it is not abroad that Hungarians' income is to be found. In fact, most economists believe that the period of stagflation cannot be recovered quickly, as price levels have remained high while the population remains pessimistic about the economic situation. Historical experience shows that the shock to real incomes is not recovered overnight. Retail sales, for example, fell in 1997, despite real wages having risen substantially in those years after a difficult period, but consumption remained weak in 2010-11, while earnings rose above inflation.

01 Retail sales and real wage changes in Hungary

In fact, it seems that the savings rate is extremely high, with people saving rather than spending some of their surplus income. This is mostly the case for those who are at a higher income level and have substantial savings.

Within household incomes, overall, entrepreneurial and other incomes have risen the most in recent years. Between the beginning of 2021 and 2024 Q1,

the net national income of the economy grew by 57.7% in nominal terms;
social benefits in cash provided by the state increased by almost the same amount in forint terms, i.e. by 53.7%;
mixed income, which includes entrepreneurial income and interest earned on savings, has shown the largest expansion over the past quarters, rising by nearly 75%.

03 Development of sources of disposable income

Due to the structure of incomes, higher income households have seen their incomes rise at a higher pace,

the MNB writes. Due to the fact that the share of transfers is highest in the bottom quintile and the share of entrepreneurial income is highest in the top quintile, households in the top quintile experienced the largest cumulative nominal income growth, while the lowest growth was seen in the bottom quintile.

The more affluent groups, i.e. those with higher savings rates, benefited more from yields.

The combined effect of these was that the real income of households in the top income quintile rose by 21.4%, while the price-adjusted income of households in the bottom income quintile rose by 11.4% in the period surveyed.

04 Nominal change in household income and

In Q2 2024, household consumption expenditure was 14.9% higher than in Q1 2021, placing Hungary in the top third of the European ranking. Consumption in each Member State of the European Union exceeded the level of three years ago, with the Visegrad countries showing a smaller increase than Hungary on average. In Poland and Slovakia the increase was 11.2 and 10.5% respectively. Romania and the Czech Republic represent the two extremes among the countries of the region: while Romanian household consumption grew by nearly 19%, Czech consumption increased by only 5% in the first quarter compared with the level at the beginning of 2021. Overall, compared to the base at the beginning of 2021, the expansion of domestic household consumption is in the top third of the region and the EU.