Slowly but surely, investments in Hungary are hitting rock bottom

In the past 13 quarters, we have only seen an increase in the volume of investments on a quarterly basis twice, but even then, the short-lived surge was followed by a significant decline. Thus, in the third quarter, the level of investments in Hungary is 28% lower than the peak in mid-2022.

We have covered the reasons for the decline in investments extensively on the pages of Portfolio. The significantly overestimated (and grossly overpriced) investments began to decline at the beginning of 2022, but no one expected such a steep decline. There are several reasons for this. The collapse of capacity expansion in manufacturing companies can be attributed to the weakness of our export markets, compounded by the cyclical and structural problems of the European automotive industry, which is currently unfavorable for the Hungarian economic structure. This has not yet been offset by the large greenfield developments that are already in the pipeline (and are, incidentally, slightly behind schedule, presumably also due to weak external demand). Investments are also being held back by a lack of EU funds and low levels of confidence among businesses and the general public. Government orders are not providing much impetus either, although some data suggest that the sharp cuts in budget-funded developments seen in recent years (partly due to the logic of the election cycle) are coming to an end.

Detailed data will only be available in a few weeks, so all we know about the structure of investment dynamics is what we can see in the KSH announcement: "The decline in investment was mainly due to the transport, storage and manufacturing sectors. The decline was mitigated by growing investment activity in financial services."

In the first three quarters, investment performance was 5.4% below last year's very weak level.

Investments have been shrinking in Hungary for three consecutive years,

and a longer period of decline has only been seen once in the past three decades, during the financial crisis.

We expect a slow turnaround in investment trends starting in the next quarter. On the one hand, there is a technical reason for this: in some areas, investments are already close to the level of depreciation, with no further room for decline. On the other hand, the completion of a few large-scale investments and the traditional surge in government development projects ahead of elections will also help to stem the decline, so we expect an upturn next year.

The Central Statistical Office (KSH) has made significant revisions to investment data. While these changes primarily impacted investment price indices (with a notable "major data provider correction" for 2024), the most notable development is the 4-7% increase in investment volume over the past two years. Last year, for instance, the average annual decline decreased from almost 14% to approximately 12%.

The current revision will certainly impact GDP growth figures. The Hungarian economy has been stagnating for over three years, so we can expect the rise in investment data to improve the growth picture of the past two years to some extent.

Cover photo (for illustration purposes only): Getty Images