THE MACROSCOPE REPORT HUNGARIAN ECONOMIC OVERVIEW Q4 2023
HUNGARIAN ECONOMY IS EXPECTED TO DELIVER A RECOVERY In 2023 Q2, Hungarian GDP contracted by 2.4 percent on an annual basis. In quarteron-quarter terms, economic output has fallen for the fourth consecutive quarter. On the production side, the year-on-year downturn in the economy was softened by the good performance of agriculture. Added value from agriculture increased by 67.9 percent. On the consumption side, household consumption fell (-3.2 percent), and investments contracted significantly (-15.6 percent) in year-on-year terms in the second quarter. The change in inventories had a negative impact on growth in the second quarter (-2.3 percentage points). Net exports were positive though which was explained by a decline in imports as domestic demand declined, the new export capacities (especially in battery production) and the improving terms-of-trade. EXECUTIVE SUMMARY The backward-looking statistics give an ugly picture of the Hungarian economy. Quarter-on-quarter GDP growth was negative in the previous four quarters (Q3 2022 – Q2 2023), signaling a fully fledged recession. The massive deterioration of the terms-of-trade in 2022 and the consequent large external imbalance was
GDP % CHANGE 8 7
GDP change %, yoy
6
GDP change %, qoq
5 4 3 2 1 0 -1
2022 Q1
2022 Q2
2022 Q3
2022 Q4
2023 Q1 Source: KSH
1
THE MACROSCOPE REPORT HUNGARIAN ECONOMIC OVERVIEW Q4 2023
one reason of this poor performance. Economic policy measures further aggravated the problems: a loose fiscal and monetary policy in the run-up to the 2022 elections had to be turned around eventually. After the elections, the government announced a number of fiscal consolidation measures, including extra sector taxes and the postponement of a large number of public sector investment projects. At the same time, to combat high inflation and to prevent a fully-fledged currency crisis, the central bank had to increase the policy rate. The benchmark interest rate was increased to 18 percent in October 2022. Economic policy therefore took a 180 degree turn in a short period of time, and by the second half of 2022 it became restrictive.
INTEREST RATE 20 18 16 14 12 10 8
base rate
6
reference rate
4 2
l2 Au 2 g 2 Se 2 p 2 O 2 ct 2 N 2 ov 2 D 2 ec 2 Ja 2 n 2 Fe 3 b 2 M 3 ar 2 Ap 3 r2 M 3 ay 2 Ju 3 n 2 Ju 3 l2 Au 3 g 2 Se 3 p 23
22
Ju
22
Ju
ay
M
n
2
22
Ap
r2
22
ar
M
b Fe
Ja
n
22
0
Source: MNB
The high interest rate environment, disappearing public sector investments and the lack of EU funds dried up investment demand. Super-high inflation (i.e. over 25 percent year-on-year in 2023 Q1) resulted in a negative real income of the households – household consumption contracted massively. The performance of the Hungarian economy would have been much worse if the normalization of the European energy prices would not have come (therefore an improvement of the terms-of-trade kicked in) starting already in 2022 Q3 but getting back to close to normal by 2023 Q2. Another important factor helping the Hungarian economy to undergo a relatively shallow recession was the ever-increasing manufacturing export capacities especially in the car industry and the related car battery plants. Even if the European car industry does not perform well, the fundamental changes of the industry, the shift towards electromobility, and the parallel massive industrial capacities opening up (with much more in the in pipeline) improves the positions of Hungary. Going forward, the Hungarian economy is expected to deliver a recovery in the second half of 2023. Partly it is explained by the base effect (i.e. recession started in the second half of 2022, making the base relatively low). Real wages are expected to come into the positive territory for the last quarter of the year as inflation is getting more moderate towards the end of the year. Therefore, household consumption is likely to increase in a year2