Hungarian economy expected to post weak rebound in 2024

While third-quarter GDP data surprised on the upside, the underlying weaknesses of the Hungarian economy will mar the 2024 economic rebound, according to a report by BMI, a Fitch Solutions company. A challenging external environment and a tight fiscal position all point in the direction of suboptimal growth next year.

In the third quarter of the year, the Hungarian economy displayed signs of recovery with a quarter-on-quarter expansion of 0.9%, although a year-on-year contraction of 0.3% persisted. This data resulted in a year-to-date GDP contraction of 1.2% in 2023. A revision of historical data revealed that the previously reported Q2 contraction of 0.3% was, in fact, flat, indicating that the economy emerged from recession last quarter, contrary to the previous understanding of a four-quarter recession.
Buoyed by the positive surprise in Q3, BMI anticipates Hungary's GDP to contract by 0.7% in 2023, factoring in a 0.3% quarter-on-quarter expansion in Q4. The economy appears to have hit its low point, with manufacturing slowly recovering in Q3, as indicated by industrial production figures, and quarter-on-quarter contractions in retail sales slowing down to the best levels since June 2022.

Poor economic outlook
Despite the encouraging signs in Q3, the overall outlook for the Hungarian economy remains challenging, the BMI experts said. Short-term hurdles, including elevated inflation, tightening financing conditions, and a challenging external environment, will hinder a robust growth rebound. Long-term challenges, such as demographic headwinds from an aging population and anti-migrant government policies, along with obstacles to capital investment and productivity growth, are expected to limit growth.
BMI experts, in light of revised historical data, adjusted the 2024 forecast downward from 1.9% to 1.6%. This revised forecast includes projections of 0.3% quarter-on-quarter growth in Q1, followed by 0.4% in Q2, and 0.5% in both Q3 and Q4. These growth rates fall significantly below the 1.0% quarter-on-quarter average recorded from 2015 to 2019.

Fiscal challenges
The credit outlook is expected to worsen before improving. Credit extension for investment is closely correlated with real interest rates in Hungary. Despite an anticipated cutting cycle at the central bank, inflation's downward trajectory will likely push real rates into positive territory, impacting growth marginally.
The credit squeeze is compounded by fiscal spending constraints, which are already evident and expected to tighten further. The government, grappling with high pandemic-induced expenditures and fiscal stimulus leading up to the April 2022 elections, is currently running a massive deficit of 10.2% of GDP in Q1 2023 and 6.6% in Q2 2023. Pressures from market forces or EU stability and growth pact regulations are expected to drive continued fiscal retrenchment.

Limited growth support
The government is likely to continue relying on the private sector to finance spending through price caps and "extra profits" taxes, according to the report. However, these measures have faced criticism for diminishing the competitiveness of Hungarian businesses and discouraging foreign investment. The Hungarian private sector, burdened by high debt compared to other regional markets, may face challenges in the medium term.
Growth support from the external sector is unlikely due to the Eurozone's expected below-trend growth, a significant export destination for Hungary. Industry and consumer sentiment surveys indicate a generally pessimistic outlook. While there are some positive indicators, such as an uptick in manufacturing PMIs, these are noted for their volatility and limited reliability due to a low number of respondents.
Despite the prevailing challenges, there is a potential upside if the government undertakes substantial reforms, unlocking significant EU funding for fixed investment. Such reforms could present a major boost to growth beyond the current forecasts, although this scenario is considered unlikely.
“To the upside, our bearishness may be overdone. Although we believe it unlikely, the government may wholeheartedly reform – which would unlock significant portions of EU funding for fixed investment and pose major upside to our present growth forecasts,” the BMI analysts said.