HUNGARIAN ECONOMIC OVERVIEW
Q3 2024
HUNGARY OUT OF RECESSION, BUT STRONGER GROWTH NOT EXPECTED UNTIL 2025
Having reached the mid-way point of the year, this is an excellent time to look back at how 2024 has progressed through H1 and how it might continue to do so into H2 and beyond to 2025. Hungary’s Economic recovery started in the first quarter of 2024. For now, it is driven by household consumption growth and a positive balance of the trade of goods and services. The global trend of ailing manufacturing while the service sector is doing okay is also the main characteristic of the Hungarian economy. Not only is industry doing poorly, but investment activity is also subdued. The picture for the rest of the year may only marginally improve. The negative cycle in manufacturing is expected to turn around only slowly towards the end of 2024, with 2025 a more promising year.
For 2024, GDP growth is expected at 2.2%, rising to 3.4% in 2025. The previous labor market problem of scarce available workers will resurface in 2025. The external balance is turning into a surprisingly large surplus, primarily driven by improving net exports, while the fiscal side is more challenging. The EU’s Excessive Deficit Procedure will start soon, and the Hungarian Government needs to find how to deliver a credible and sustainable fiscal adjustment. If that is secured and the still frozen EU funds are successfully unblocked, a rating upgrade will likely follow. However, for now, the chances seem rather slim for this scenario.
Inflation moderated below 4% at the beginning of 2024, but no further decrease is expected for the remainder of the year. Indeed, the contrary is the more likely case. Average inflation is seen at around 4% for 2024, dipping marginally lower in 2025. The EUR/HUF exchange rate is expected
THE MACROSCOPE REPORT
HUNGARIAN ECONOMIC OVERVIEW
Q3 2024
to stay in the 390-400 range for now and 400-410 in 2025. The key interest rate had reached 7% by mid-2024. Another 50 basis point interest rate cut may come in the second half of the year. This signals a cautious monetary policy stance for now, but a new governor (György Matolcsy’s second and final six-year term will expire in March 2025) may bring a different approach.
ECONOMIC GROWTH STANDS ON TWO LEGS
In Q1 2024, the Hungarian economy grew on a quarter-on-quarter and year-on-year basis. This was last seen seven quarters ago, in the second quarter of 2022. Hungary is now well out of recession, although the GDP performance has not yet reached the level of that quarter. In terms of the structure of growth, there have been improvements in two areas: on the one hand, there is a short-base growth in household consumption, and, on the other hand, we see an improvement in net exports. However, it is worth putting these results in context: household consumption is still in the recovery phase (in other words, it is still below its previous consumption peak after a significant fall in the second half of 2022 and in 2023). The improvement in net exports has positively contributed to growth, although, for the time being, we can only speak of a fall in exports lagging behind the fall in imports (basically in the trade in goods).
Meanwhile, manufacturing is suffering, investment is falling, and the external environment is uncertain. So, the growth picture is rather bleak. Nevertheless, the situation in global manufacturing could gradually improve towards the end of the year and more pronouncedly in 2025, partly as the international manufacturing cycle is expected to shift into positive territory and partly as new production capacities are developed in Hungary. Overall, the assessment of Hungarian economic performance has not changed, with GDP growth of 2.2% expected this year and 3.4% next year.
CONSUMPTION: THE MAIN ENGINE OF ECONOMIC GROWTH
Gross domestic product increased by 1.1% in Q1 compared to the same period of last year and by 0.8% over the previous quarter. According to the seasonally and calendar-adjusted data (used in international comparisons), Hungary’s economy expanded by 1.7% on an annual basis in the first quarter.
Household consumption contributed the most to the improved performance in the first three months of the year: Actual final consumption increased by 2.4% in a yearly comparison. Actual final consumption of households increased by 3.4% compared to the same period of the previous year. This supported GDP growth by 1.8 percentage points. Consumption increased in most product groups: non-durable goods volume increased by 4.4%, services by 2.4%, and durable goods by 1.8%, but consumption of semi-durable goods decreased by 0.4%. The domestic consumption expenditure of households (realized within Hungary) became 2.8% higher. The volume of social transfers in kind from the government increased by 1.4%, while the actual final consumption of the government decreased by 2.7%. The volume of social transfers in kind from non-profit institutions increased by 10.1 %.
