Hungary's automotive industry, a key pillar of the country's export-driven economy, continued to show signs of strain in January, as the latest figures from the Central Statistics Office (KSH) confirmed ongoing declines in production and new orders.

Automotive manufacturing, the largest segment within Hungary's industrial sector, saw production volumes fall by 3% year on year in January, while the production of automotive parts dropped by 6.2%, highlighting prolonged challenges in the sector. These declines contributed to an overall 3.9% y/y (chart) contraction in the industry, as confirmed by the Central Statistics Office (KSH) on March 13 in a second reading.

The slump in Hungary's automotive sector is largely driven by weak external demand, as the country's major export markets – particularly Germany and other Western European economies – are grappling with sluggish car sales and delays in the transition to electric vehicles (EVs). The industry is heavily reliant on foreign markets, with more than 90% of automotive production destined for exports.

One of the most concerning trends is the sharp drop in electrical equipment production, which fell by 30% y/y, reflecting weaker demand for EV components. The battery manufacturing segment, which has been a major area of government-backed industrial investment, suffered a steep 46% decline.

Hungary has positioned itself as a major European hub for battery production, attracting investments from major Chinese and Korean firms, such as CATL, Samsung SDI, and SK Innovation. However, slowing EV adoption in key export markets, particularly Germany, is putting pressure on local battery manufacturers.

European carmakers have been facing lower-than-expected consumer demand for electric vehicles, as well as delays in state subsidies and high production costs, which have contributed to the overall slowdown in the battery sector.

The order book does not paint a swift rebound either, as new orders for industry fell 2.6% y/y, with domestic orders dropping by 4.4% and export orders declining 2.4%, according to the KSH report. Meanwhile, the total order backlog for the industry was 13.6% lower than in January 2023, suggesting that factories are struggling to secure new contracts and that production volumes may remain weak in the coming months.

The weak industrial performance could remain a drag on GDP, set to grow by 2% this year, below the government's official 3.4% target.