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 currently facing many challenges:
- Firstly, Hungary continues to post the highest inflation data in the region even if it appears to have reached a peak in January. Core inflation is also sticky. And Monetary policy has turned more dovish and this may delay the fight against inflation;
- Secondly, the housing market is weakening. Residential prices are increasing at a softer pace. Similarly, the delivery of building permits alongside with household credit growth have softened markedly.
- Meanwhile, fiscal deficit came in at 6.2% of GDP in 2022 and was well above the official target. This year, the target may be challenged again. Indeed, the cumulative deficit for the first four months is close to the full year target. And in the latest Convergence report published last month, the government also revised its fiscal deficit estimates higher for 2024 and 2025.
- The fourth challenge concerns EU funds in favour of Hungary which remain locked. While the judicial reform recently voted in Parliament is a positive step, Hungary would still need to meet 27 “super milestones” set by the European Union before funds can be unlocked. And this may take some time.
There are however some positive developments worth mentioning.
- External imbalances narrowed since the beginning of the year. Trade balance turned to a surplus, both in February and March and this should help in easing the current account deficit.
- We also note that market sentiment remains positive towards the Hungarian forint. Since January, the forint is the best performing currency in the region with a 10.6% gain against the dollar and an 8.5 % appreciation against the euro.
Thank you for your attention. See you soon for another ECOTV week
