Factors underlying low investment in Hungary

Since the onset of the economic crisis, an unprecedented downturn in investment in the national economy has occurred in the past four years. This marked decline has been registered in all sectors of the economy, albeit to differing degrees. Investment is a key aspect of convergence for the Hungarian economy as the renewal and expansion of the capital stock determines the magnitude of production capacities, and through that, economic output. The lack of investment by the government sector and households mainly reduces gross domestic product in the short term, while the decline in corporate investment not only directly reduces aggregate demand, it also has a negative impact on Hungary’s potential growth in the medium and long term. Our analysis examines the development of investment in a regional comparison, in a breakdown by sectors, starting from the pre-crisis years and primarily focusing on the period of the crisis. In a regional comparison, investment trends in Hungary were already moving in the wrong direction before the crisis, with the investment ratio gradually declining as a percentage of GDP. The adjustment of 2006 considerably reduced government expenditures, and simultaneously the less favourable demand conditions resulted in a general drop in corporate investment. As a combined result of the above, at the onset of the crisis Hungary had the lowest investment rate in the region. After 2008, the combination of the major economic slowdown, the persistently weaker demand prospects, the substantial balance sheet adjustment requirement for the public and private sectors alike and the marked downturn in the lending activity of banks caused a substantial decline in investment. In Hungary, the decrease in accumulation by households has been significant in international comparison, while the government’s investment ratio has remained stable in recent years, mostly as a result of the accelerated use of EU funds. The drop in corporate investment proved to be substantial primarily in sectors producing for the domestic market and in the service sectors, while investment by companies producing for exports was boosted considerably by large projects in the manufacturing industry. As a result, the investment situation is more favourable in this segment.