Construction sector nosedive continues to cast shadow over Hungarian economy

Construction sector nosedive continues to cast shadow over Hungarian economy
Hungary's construction sector has nosedived in 2016
By bne IntelliNews July 15, 2016

Hungary’s construction output plummeted 26.6% y/y in May, statistics office KSH reported on July 15. The data suggests a free fall in the sector that started in January due to a sharp decline in projects driven by EU funds continues unabated.

Although on a monthly basis output grew 0.8%, May marked the fifth month of huge annual decline in a row, following a 29.8% y/y drop in April. While the auto sector’s struggle to stabilise continues to impact Hungarian industry, the weak output of the construction sector will only raise concern over the country's wider economic performance in the second quarter, after it registered a 0.8% q/q contraction in Q1.

The fall in construction output reflects declines in both building construction and civil engineering. However, it was the 43.8% drop in the latter that did most of the damage. While the volume of new contracts was 15% higher in annual terms, the month-end volume of the contract portfolio of construction companies was 10.5% lower than a year earlier, suggesting a pick up is not likely in the immediate future.

Like its regional peers, Hungary rushed to absorb as much financing from the EU's 2007-13 budgetary window as possible in 2015, as it sought to catch up in the final year for claims. Projects funded under the 2014-20 programme are yet to get up and running.

Hungary has said it is pushing to accelerate the process in order to soften the impact on the economy. The government is set to allow businesses that win EU funded tenders to receive 50-100% of funds in advance. The European Commission, however, is reported to oppose such a high level of advance payments.

In an additional to the bid to support the EU funds coming into the sector, the government has also lowered value added tax on home building to 5% from 27% in 2016-2019, announced a new housing subsidy programme, and also a scheme to set up state-backed building societies.