Macroscope Report 2023-Q1

THE MACROSCOPE REPORT HUNGARIAN ECONOMIC OVERVIEW

Q1 2023

IS THE WORST OVER YET?

In the middle of Q1 2023, it seems we are almost through the worst of the economic downturn. In the early fall of 2022, amid skyrocketing European energy prices and energy supply uncertainty, one could only have hoped for the rapid and positive turnaround that finally took place. At the end of January, European gas prices (Dutch TTF futures were in the range of EUR 50-60 per megawatt) were roughly one-sixth or one-seventh of their late August peak. Electricity prices have come down by a similar magnitude.

With the previous extra-high energy prices in the summer and autumn months of 2022, industry in Hungary and much of Europe faced the prospect of a severe loss of competitiveness and the most profound financial challenges. Rising energy import bills caused huge external imbalances that were barely financeable in some countries (including Hungary). By the end of 2022, it became apparent that the larger part of Europe had managed to become independent of Russian energy imports, meaning that in 2023 we no longer face the risk of not having the necessary quantities of energy supply (be it crude oil, natural gas, or coal). This is a much more reassuring environment than that which we recently faced. 01

THE MACROSCOPE REPORT HUNGARIAN ECONOMIC OVERVIEW

Q1 2023

While the euro area economies can avoid a crisis, if not a significant slowdown, most will not enter a technical recession, defined as two consecutive quarters of negative GDP change. For Hungary, with its very open but relatively small economy, the external environment is crucial. In the second half of 2022, Hungary most certainly was in recession, but 2023 could bring a slow recovery. While last year’s economic growth exceeded 4% annually (even with the sharp slowdown in the second half of the year), an expansion of around 1% in 2023 seems realistic. The energy trade deficit in 2023 is expected to come in lower than it was in 2022. If, for example, current energy prices would stay with us, we could see an EUR 8 billion-9 bln improvement in the external position. Real household income will likely be negative in 2023, even though tight labor market conditions prevail. Exports, however, are likely to perform well, partly due to the steady and significant expansion of export capacities (principally in the automotive and related sectors, with a particular focus on car battery manufacturing) and partly due to the supportive effect of the weak HUF exchange rate on competitiveness.

THE FORINT

2023 is unlikely to become known as “The year of the HUF.” In other words, the forint is not expected to appreciate against the euro this year. The sub-400 HUF exchange rate against the EUR at the beginning of the year may prove temporary. Despite the relative consolidation of the European energy market and its benign impacts on the Hungarian economy, several factors could still push the exchange rate in a weaker direction. First and foremost is the EU-related news flow. The much-awaited agreement between the Hungarian government and the European Commission was reached by the end of 2022. The deal allowed Hungary to avoid the risk of a significant and irrecoverable loss of resources. 02