November 11, 2008 / 3:53 PM / 9 years ago

Hungarian workers suffer as car crunch closes in

DUNAKILITI, Hungary (Reuters) - Hungarian auto worker Ferenc Sagi has read about the world financial crisis in the papers but did not think it would have much impact on his life in this sleepy town near the Austrian border.

Now there is little else he can think about.

The global meltdown has already cost Sagi his job, and will now drag Hungary into its first recession since the early 1990s and put tens of thousands of Central Europeans out of work.

“I had watched the news about the economy but never thought it would hit us so quickly,” Sagi told Reuters.

“But in a way, it’s understandable... In times of trouble, this sector will be hit first.”

U.S. auto sales dropped by a third in October to their lowest level in a quarter-century and European sales are off sharply, plunging 40 percent in Spain and 19 percent in Italy as recession hits both sides of the Atlantic.

Investment in cheap production in the EU’s eastern wing has made the car industry a bellwether for the economy and recession is bad news for Hungary, which turned to the International Monetary Fund last month to stave off a financial default.

The IMF has helped restore some confidence and relatively cheap labor has continued to draw foreign investment this year. But the economy is only beginning to feel the pain, and the car industry is the canary in the coalmine.

”The sector has slammed on the brakes, said Herbert Rupp, the Chairman of the Association of the Hungarian Vehicle Component Manufacturers.

“There is a recession, people are being laid off, production is being scaled back but the region’s location and low labor costs still mean that capacities are being located here.”

The Hungarian units of auto firms General Motors, Bosch, Audi, France’s Valeo and Germany’s Veritas AG have already announced job cuts. Other sectors have been quick to follow, with General Electric, one of Hungary’s biggest employers, saying it would let 500 people go.

Analysts say the jobless rate may climb over 10 percent by mid-2009.

FAMILIES HURTING

Hungary is not the only emerging European country facing trouble. Slovakia has cut its 2009 growth outlook to 4.6 percent from this year’s 7 percent, while the Czech Republic sees it slowing to 2.9 percent from 4.5 percent now.

Volkswagen AG’s Czech unit, Skoda, the country’s largest exporter, will cut production this month and next, reducing output by 31,000 cars from its original plans. The Czech Car Manufacturers Association says 10,000 of the country’s 130,000 car workers could lose their jobs in the next six months.

Romania’s Dacia, a unit of Renault, one of the country’s biggest employers, also announced a two week production halt later this year.

But Hungary is worse off. Credit rating agencies Fitch and Moody’s have downgraded it, and only the $25.1 billion IMF-led rescue package and a 300 basis point rate hike halted a fall in the forint currency to an all-time low last month.

In Dunakiliti, a town of 1,750, the biggest employer, German auto firm Veritas AG, has laid off 10 percent of its workforce and is expected to cut more. The firm has also helped build roads, a sewage treatment plant and other projects, and that could now stop too, cutting off another pipeline to prosperity.

“I think layoffs could affect up to 30 percent of car industry workers.” said Zoltan Szoke, secretary general of Vehicle Union, a trade union.

“Everybody will be forced to scale back and let people go... The economy relies so heavily on car manufacturing that its pain, through suppliers and subcontractors, will be felt by hundreds of thousands of families.”

Hungary expects its economy to contract by 1 percent in 2009 but some analysts say this forecast is still too optimistic. Real wages will fall by 2.7 percent and consumption will be down 3.1 percent.

Tibor Jager, the managing director of Veritas AG’s Hungarian unit, said the key now would be how the government stimulates the economy, particularly as they simultaneously cut costs under the IMF rescue plan.

Executives say Hungary’s high taxes and cumbersome regulations also make it less attractive, and they have called on the government to do a lot more to save jobs.

“I think Hungary is forgetting completely that it is part of a complex world,” said Frederic Ollier, who heads the Hungarian unit of drug maker Sanofi-Aventis. “Hungary thinks it’s alone in the world... and it’s definitely losing ground every day.”

Having lost his job in the mayhem, Ferenc Sagi plans to move into Gyor, a much bigger town 50 kilometers away and find a job in another sector, possibly logistics.

“I‘m definitely going to learn English now and will definitely develop new skills to find my place,” he said. “I‘m an optimist (about finding work), being a pessimist would just be self defeating.”

Reporting by Balazs Koranyi; Editing by Michael Winfrey and Patrick Graham

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