Economic growth prospects are improving for 2024, but the recovery is likely to be limited by still sluggish domestic demand. On the foreign exchange market, the Hungarian forint has come under downward pressure recently. On public accounts, the fiscal consolidation that began in the summer of 2022 has not significantly reduced the deficit. For 2024, the deficit will probably be less pronounced than last year, but will remain high in any case (around 5% of GDP). As a result, Hungary will probably be subject to an excessive deficit procedure in 2024
After an expected recession in 2023, better growth prospects lie ahead in 2024. Economic activity is expected to be driven by both an improvement in domestic demand and a slight rebound in growth in the Eurozone. The monetary easing cycle initiated at the end of 2023 should continue, albeit cautiously, due to the persistence of strong wage pressure. External accounts remain strong, with foreign exchange reserves having increased for several years. Hungary is expected to post a current account surplus in 2023, after a deficit of -8.2% of GDP in 2022. As to public accounts, the budget deficit has continued to deteriorate, and is expected to exceed 5% of GDP in 2023. Like many European countries, Hungary may face an excessive deficit procedure in 2024.
In Central Europe, capital flows (foreign direct investments, portfolio flows and bank lending flows) have resisted rather well despite geopolitical uncertainties. Similarly, they do not seem to be affected, for the time being, by the weakening of economic activity in the region.
Economic activity has weakened significantly in the last three quarters. In Q1 2023, GDP contraction was largely attributed to the drop in domestic demand. For 2023, the scenario of a weak recession seems to be emerging, due to a strong negative carry-over effect. Moreover, prospects for a recovery are weak in the short term, as inflation remains very high and the real estate market is showing signs of weakness. In 2022, budget and current account deficits increased due to the energy shock. However, debt ratios (public and external) worsened slightly. In 2023, external accounts are expected to improve thanks to the easing of commodity and energy prices.
Earlier this week, Hungary published its GDP data for the first quarter. It fell by 0.2 % compared with the previous quarter after -0.6% in Q4 and -0.8% in Q3. This is not a major surprise given that high frequency indicators such as retail sales and industrial production were already pointing to a weakening in economic activity. Elsewhere, in the region, GDP growth was also soft though we observe a better performance in Czech Republic Romania and Poland. The Hungarian economy is experiencing numerous challenges while some positive developments provide some relief.
Economic activity weakened in the third quarter. The outlook remains gloomy in the short term. Last September, the central bank ended its monetary tightening cycle in the face of downside risks to growth. This policy is currently not very consistent with the trajectory of inflation. Meanwhile, fiscal policy was tightened in the second half of the year due to the marked deterioration in budget deficit. The EU’s freezing of funds in 2022, depriving the Hungarian authorities of a source of income, has probably weighed on their decision. While this recalibration limits support for growth, it strengthens the credibility of Hungary’s fiscal policy.
Economic growth remained very dynamic until the first quarter of this year. Strong wages growth and significant government measures to back up purchasing power over this period have supported consumer spending. Inflation rose sharply in recent months but remained lower compared to other Central European countries, due to a price cap on certain food and energy related goods. Economic growth is expected to slow down significantly in 2023, owing to the deterioration in the international environment, monetary and fiscal tightening from H2 2022. The temporary suspension of European funds presents a serious challenge given that budget and current account deficits have increased and external liquidity has eroded.
Hungary is benefiting fully from a high international trade exposure, which is now driving its growth. Supply-side pressures are increasing, with high capacity utilisation rates and rising scarcity of labour. These local issues come on top of global industrial shortages. This has resulted in a significant acceleration in inflation, to which the Central Bank has responded with its first policy rate increase in 10 years. Nevertheless, monetary policy remains relatively accommodative, as the Central Bank has acquired the equivalent of nearly 5 points of GDP of government debt in 2021. This support is important in a context where access to European funding (including the resilience and recovery plan) remains subject to sticking points (notably the rule of law clause)
The Hungarian economy was hit particularly hard by the effects of the Covid-19 pandemic in the 2nd quarter of 2020, due to the weight of exports in its GDP. The shock seems to have been absorbed relatively well, with the government and central bank focusing on supporting the labour market and introducing the necessary moratoriums on interest payments and loan repayments. The stimulus measures introduced have been constrained in particular by the need to avoid an excessive depreciation of the forint. The reduction in government debt, interrupted this year, is likely to get back on track quickly, within the framework of an unchanged strategy: maintaining a moderate corporate tax in order to continue to attract foreign investment in the manufacturing sector.
Hungary has a population of 9.8 million people. The country belongs to the group of high-income countries. It became a member of the European Union in May 2004 but remains outside the Eurozone.
Macroeconomic fundamentals were relatively sound before the COVID-19 outbreak and have not been jeopardised by the fiscal and monetary stimulus implemented to cope with the shock. This support has driven strong GDP growth in 2021 (8%), mainly driven by exports and manufacturing sector performances. Inflation pressures have reappeared, triggering the first monetary policy tightening since 2011 as inflation should end 2021 at 4.6% on average, significantly above the 3% central bank target. Public debt has risen to 80% of GDP in 2020, but quantitative easing from the central bank is making it affordable. Relations with the EU must continue to be monitored. However, Hungary’s attractiveness for foreign direct investment (FDI) has remained strong based on cheap labour costs and economies of scale related to the size of its manufacturing sector
