Real wage growth in Hungary drops to multi-year low

After the positive surprise in April, the wage statistics for May presented a more balanced picture. According to the latest data released by the Hungarian Central Statistical Office (HCSO), the pace of wage growth slowed significantly in May. Following an unexpectedly strong April, the market consensus had anticipated continued dynamic growth, but the actual data was much weaker. The 7.8% year-on-year growth in average earnings was weaker than even the most pessimistic market forecasts.

Perhaps more importantly for the real economy, the slowdown in wage growth occurred alongside high inflation, resulting in a modest change in purchasing power. In May, the real value of average net wages increased by 3.2% YoY. This is in line with the historical average and is not problematic in itself. However, the change in the purchasing power of households resulting from the combination of high inflation and high nominal wage growth is undesirable in the long term. Moreover, compared to the double-digit increase in real wages between late 2023 and late 2024, this slowdown is likely to make consumers feel as if their financial position has deteriorated, even though the increase in purchasing power of disposable income has just normalised.

Looking at the May data more closely, it seems that employers may have been more cautious about bonuses, since regular earnings increased more quickly than average wages, which include premiums and one-month bonuses.

Compared to April, only the budgetary sector experienced an acceleration in wage growth. We believe this is due to wage settlements for public administration and defence workers. In contrast, the wage index declined in the non-profit and business sectors compared to April's positive surprise.

In the business sector, average wage growth of 7.4% resulted from mixed developments in the subsectors. Focusing on key areas, wage growth slowed to below 6% in manufacturing, as last year's wage agreements containing high salary increases expired. However, earnings growth in industry as a whole also slowed to a pace not seen since 2021. There has also been a marked slowdown in the transport and storage sector.

This means that persistently weak industrial performance is now reflected in wage statistics for the direct sector and related areas. A notable slowdown has also been observed in the financial sector, with wage growth reaching a low not seen since 2021.

When we look at April and May together, the overall picture for this year remains much the same as when we examined the data from the first quarter. We still expect average wage growth of around 8% for the national economy in 2025. However, risks are rather tilted to the downside due to weak business confidence indices, tough stances by companies in ongoing industry wage negotiations and a general easing of labour market tensions. These factors could lead to a more significant slowdown in wage growth than expected.

With an expected average inflation rate of 4.6% this year, real wage growth may slow to around the historical average of 3.2%. A key question for 2025 is whether consumer confidence can recover in a situation where the perceived change in financial conditions is weaker than over the past year or two. For now, the answer is probably no, given that the consumer confidence index has fallen to its lowest point in nearly one-and-a-half years over the past two months.

Thus, rather than improving consumer confidence, the recent series of government interventions has made economic agents even more hesitant. If weak confidence persists, the dominant process will be the accumulation of further savings and the reinvestment of existing savings. The lack of an increase in the propensity to consume poses a risk to our current forecast of economic growth of around 1.0% this year.