The Road to "Economic Neutrality": Services Exports

Hungary's external trade balance and its impact on the economy are regularly discussed by analysts, but it is mostly the trade balance in goods that is discussed. However, the other important component of the domestic external trade balance, the external trade balance in services, is also important to address in the shadow of the reindustrialization ‘plans’, the Hungarian Economic Research Institute (GKI) says in its latest analysis.

In 2020 and 2021, both exports and imports of services were stagnant due to the closures caused by the new coronavirus epidemic. From 2022 onwards, the quarterly export value of services (+34%) grew faster than imports (23%). The largest player on both the export and import side is business services, with tourism and transport services being the sectors with the largest export surpluses.

Weakness in product exports (mainly machinery and transport equipment and manufactured goods) is a problem for the Hungarian economy. Fortunately, imports of goods have moderated more, driven by two factors: falling energy prices and a decline in non-energy import volumes. For Hungary, the latter is a problem, as it is a sign of slow growth in household consumption and the weakness of 'import intensive' companies producing for export.

Although the volume and total value of external trade in goods far exceeds that of services, the latter's importance in Hungary's external trade balance is undeniable. The external trade balance in services has been in surplus throughout the period under review, which has played a major role in the fact that the Hungarian external trade balance has been positive since 2020, except for two quarters (of which four quarters remained positive only because of services).

To sum up, the analysis points out that the weakness in merchandise exports has been offset by services, thus improving the trade balance. Building on this trend, the need for jobs for an increasing number of graduates (using significantly less state aid) should be attracted to Hungary (using significantly less state aid) rather than companies that move here because of subsidies, typically employing unskilled labor and/or producing low value added (such as battery factories, electric car assembly plants). This complete turnaround in economic policy needs to be implemented as soon as possible, as the National Bank of Hungary has called for. This could bring a productivity turnaround, which could be the basis for wage catching-up.