The Hungarian Economic Research Co. GKI has revised its growth forecast for 2022, it raised its GDP forecast to 3.5-4% from the previous 2.5-3%y, and lowered its GDP forecast for 2023 to between 2.5-3% from 3.5-4%.
The change is a consequence of faster-than-expected growth in the first quarter and stronger-than-expected austerity measures and inflation rate, a deteriorating global political situation, and the Hungarian government’s strained relations with the EU.
The Hungarian economy is expected to enter recession at the turn of 2022-2023. Hungary’s GDP growth rate in the first quarter of 2022 is likely to peak this year, at 8.2% year-on-year. This is the third fastest in the region (after Poland and Slovenia). Growth was driven by domestic consumption, with both household consumption and fixed capital formation growing at double-digit rates. Thus, final consumption and gross capital formation contributed 7.7 and 3.0 percentage points respectively to first-quarter growth, while the trade balance restrained economic performance by 2.6 percentage points.
On the production side, all sectors except agriculture increased their GDP output. However, some of the data for March and April already point to a slowdown in output, and the deterioration in economic expectations for the rest of the year suggests that this is likely. There may have been a slowdown in the second quarter and only a very modest growth rate is expected in the third and fourth quarters; a decline is likely at the end of the year compared to the previous quarters.
The rapid growth in the last four quarters has clearly been driven by the low base due to the Covid crisis and the recovery. (For example, in the first quarter of last year, Hungarian GDP fell by 1.4%.) But it was also the result of the excessively stimulating electoral economic policy, which, with the money injected in February (e.g., 13th month pension, tax rebate for families), specifically aimed to maximise especially consumption, but also investments, before the April elections.
All this led to a predictable dangerous deterioration of the equilibrium, such as accelerating inflation, a weakening forint, and a surge in internal and external deficits. As a result, the government announced measures to improve the balance, raising tax revenues and cutting spending, which it explained as necessary due to the Russian-Ukrainian war and EU sanctions. Although the war obviously worsened the operating conditions of the Hungarian economy, the recent rise in energy prices, the deterioration in exchange rates, the growing insecurity of energy supply and supply chains in general, and the riskier nature of the region have only exacerbated the imbalances that have been building for years.
The crisis-generating setting of the EU’s role is false and one-sided, since, on the one hand, EU sanctions are only a response to Russian aggression and, on the other, the EU’s recovery fund would offer resources for crisis management if the Hungarian government were willing to commit to the rule of law and market economy standards.
In the end, the Hungarian adjustment package will certainly reduce the huge deficit that is emerging. Given the high inflation, the government’s original target of a deficit of 5.9% of GDP seems possible. However, reaching the deficit target of 4.9% is conditional on an agreement on EU transfers, the GKI report says.
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