Even though this year is marked by rampant inflation, soaring energy prices and sharply increasing interest rates, the economic situation is set to deteriorate in 2023. According to Economy Minister Mihály Varga, the worst is yet to come for the country’s economy.
A recent international survey revealed that a third of European workers see the cost of living crisis as the biggest source of stress outside the workplace. This is more than true in Hungary where annual inflation surpassed 20% and the peak is yet to come. The war in neighboring Ukraine adds a new dimension to economic policy making as governments need to address “other nation’s issues as well,” Economy Minister Mihály Varga said at a conference in Budapest this week. According to the minister, it is becoming increasingly clear that the Russian-Ukrainian war is shaking the entire continent, including countries that are situated in more distant parts of Europe. The proximity of the war can be clearly perceived in market expectations and in the development of inflation.
“The protracted war will destroy supply chains across countries, ultimately hitting Europe's economy as a whole," he said. At the same time, the Hungarian government has the tools at its disposal to offset externalities, and he says the markets are beginning to sense this, according to Varga.
The most difficult year
With respect to GDP, the minister stressed that the ultimate goal was to preserve economic growth, which this year, according to the government's estimate, could be 4%. He stressed that the IMF was more optimistic, as they expect growth of 5.7% for 2022 in Hungary. At the same time, the minister warned that “our most difficult year is expected to be next year.” The government expects growth of around 1% in 2023, and sees the country returning to a balanced growth path of around 4% around 2023-24.
“Overall, we can say that the situation is difficult, but not hopeless. In recent periods, Hungary has emerged from every crisis stronger, and according to the government's calculations, it will not be any different now,” the minister said.
In terms of the budget deficit, the government is sticking to its deficit target of 4.9% of GDP, calculated without gas purchases, but a better result cannot be ruled out, the minister said. He noted that since May-June 2022, the deficit has not increased significantly, and in September, the budget booked a surplus of HUF 181 billion.
The government is working hard on putting the nation’s debt level on a downward trajectory, the minister said. During the pandemic, public debt levels increased throughout Europe, with the average public debt of the Eurozone climbing to around 95%, and the debt in the EU to 88% of GDP. Hungary followed a similar pattern and the debt level is above 80%. Nevertheless, the ratio of public debt held by foreign investors declined from 60% to 30%, and the ratio of foreign currency debt fell from 50% to below 25%.
Cheap energy is a thing of the past
The world needs to break away from the notion that energy is cheap, Zsolt Hernádi, chairman of Hungarian energy company Mol Nyrt. said at the same conference. Letting go of this notion will be a painful and long process that will affect everyone, from production companies to the population. According to the company manager, politics has taken control of the economy in most developed nations around the globe, which is no longer shaped and run by business decisions. A bipolar world order under the leadership of the USA and China is emerging more and more sharply. The explosion of the North Stream on September 27 means that the world has reached the point of no return, according to the expert. The world as we knew it is a thing of the past; the coronavirus crisis, the emergence of the bipolar world order, the unfolding energy crisis and the war in Ukraine will have long-term effects on the world economy.
Europe’s dependence on Russian energy sources means that the continent will have a hard time finding its footing in the new global reality.
Overall, it looks like 35-40 billion cubic meters of natural gas will be missing from the European energy system next year, and this is not a political issue. “The problem will not be this winter, as Russian gas is still coming this year; the problem will be next winter,” Hernádi warned.
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