Hungarian labour market shows no fear of recession

The Hungarian Central Statistical Office (HCSO) released the latest set of labour market data (unemployment rate, wages) and we can’t see any signs of a cool down. In fact, Hungary is still at full employment with wage growth posting a double-digit increase.

Gross average wages increased by 14.9% year-on-year in May, showing only a minor slowdown compared to the previous month’s growth rate. To get a clearer picture, we can look at regular wages (which exclude one-off payments and bonuses) and the median wage growth. Regular wages increased by 14.3% on average in May, while the median gross wage rose by 14.5% on a yearly basis. All of the metrics show a strong underlying wage dynamic, resulting in positive real wage growth despite a strong rise in inflation.

Looking at the details, wage growth in the private sector came in at 14% YoY, roughly matching the average seen in the first four months of 2022. Salaries rose by 12.8% in the public sector over a year. Meanwhile, due to educational institutions being reclassified as part of the non-profit sector, wage growth here remains on the extreme side: above 34% over a year. In this regard, we can’t see any significant change in the structure of the wage increases. A 20% increase in the minimum wage, wage settlements in the public sector, and labour shortages remain the main drivers.

Speaking of which, the June employment data points to further tightening in the labour market. The number of unemployed fell to 160,000 corresponding to an unemployment rate of 3.3% in June. These figures are now really close to the lowest levels on record seen in late 2019. We are quite confident that Hungary has reached full employment again.

Compared to the previous month, the number of labour market participants rose by 45,000, reaching almost 4.9 million in June. This increase was fully absorbed by the labour market, indicated by the fact that the number of employed increased even more than that (+53,400). With the start of the summer seasonal work, labour demand has increased mainly in agriculture and tourism-related sectors. While the significant improvement in June is partly related to seasonality, the underlying trend in the labour market remains clearly favourable.

And with that, we have reached the point where we need to talk about the flip side of this. Although the overall picture of the Hungarian labour market is quite rosy, recent data is extremely important from several perspectives. On the one hand, employment and unemployment trends still haven’t shown any sign that employers have started to adjust to a gloomier economic outlook. Though the labour market typically follows and does not predict what is to come in the economy (being a lagging rather than a leading indicator in this respect), uncertainty and a deteriorating outlook have been with us for months (war, sanctions, energy crisis, high inflation etc.).

Despite these factors, the labour market in Hungary appears to be moving in a counterintuitive direction; it is strengthening and tightening further. In our view, starting with the positives, this could mean that a possible adjustment in the labour market to the recessionary environment will start from an extremely favourable situation. The (perhaps exaggerated) optimism of companies could mean that there is a significant gap between supply and demand in the labour market and that the labour shortages will further stimulate wage growth in this possibly severe (but at least challenging) economic situation. This could further strengthen the already elevated inflation through a wage-price spiral and increase the risk of a hard rather than soft landing.

Excessive optimism could very quickly turn to excessive pessimism, pushing companies to overreact to the situation as they face a toxic mix of significantly elevated wage bills and suddenly disappearing demand for their products and services, generating a significant profit margin squeeze. Such an outcome could bring a rapid and large-scale labour market adjustment in the worst case scenario. In other words, we are in a situation, where excessive optimism and (false) confidence could turn into something quite bad.