Weak investments in Hungary drag growth

CEE Macro and FI Daily , 25. Sep.
Weak investments in Hungary drag growth

Domestic demand is a crucial part of the GDP growth: households consumption and investments account for 85 percent of GDP in Hungary. Households have recovered only partially from the 2022 energy and inflation shock as private consumption growth ticked up. Worryingly, investment activity remains subdued dragging the growth and the recovery. Actually, Hungary is the only country where investment growth declined since the pandemic making us curious about possible reasons of such development that we discuss in the detail in latest Hungary Special Report: Chasing growth. In the past 10-15 years, economic policy encouraged investments through tax reductions, state subsidies and pursuing rather accommodative monetary policy. On average, EU funds inflow amounted to 2.5 percent of GDP per year between 2012 and 2022, supporting the growth via the investment channel, as well. Although there was a rebound after the pandemic crisis - partly driven by pre-election spending - it quite quickly faded. Strict monetary policy, weak external demand, energy crisis, much lower amount of EU funds, increased uncertainties caused partly by the Russian-Ukrainian war all have led to delays of investment and FDI projects. Further, moderate willingness of firms to invest is also observable in the deposit and lending figures of the corporate sector.