Hungary Faces Economic Headwinds as Recovery Falters

Hungary's economic landscape has shown signs of strain, with the last quarter's performance failing to meet analyst expectations and casting a shadow over the 2024 outlook. Despite previous rebounds, the nation's economy hit a snag, marking a concerning pause in its recovery trajectory.

The Central Statistics Office (KSH) revealed a stagnant year-on-year output in the final quarter of 2023 following a modest 0.4% growth in the preceding period, which ended the economic contraction observed over four quarters. The seasonally and calendar-adjusted data is somewhat higher, as GDP growth in the fourth quarter was 0.4% higher than in the same quarter of the previous year.
The disappointing growth data, coupled with a 0.8% annual GDP decline last year - the first since 2012, excluding pandemic impacts - underscores the challenges Hungary faces. These figures not only fell short of analyst predictions but also highlighted potential weaknesses as foreshadowed by industry, construction, and retail sales data towards the year's end.
Péter Virovácz, a senior economist at ING Bank Hungary, expressed concerns over the weak economic momentum, citing uncertainties in estimation methods and seasonality effects that might lead to significant revisions. "The entire 2023 GDP time series was revised, confirming that Hungary was indeed in a four-quarter technical recession previously," Virovácz noted, pointing out the gravity of the situation.

Ailing industry
The economy's slight uptick was primarily driven by agriculture, rebounding from a severe drought in 2022, alongside gains in healthcare, social services, and ICT sectors. However, these positive aspects were offset by downturns in industrial and construction activities and certain market services, including trade. Such dynamics underscore the variance in sectoral performance, which was one of the reasons the 2023 budget's initial 4.1% growth assumption was downgraded to just 1.5% in mid-2023.
External factors, such as the recession in Germany - Hungary's largest export market - and stagnation across the EU, further complicated the economic landscape, according to National Economic Minister Márton Nagy. The politician highlighted the role of state interventions, including subsidized corporate lending and energy subsidies, in mitigating the recessionary pressures, suggesting that without such measures Hungary would have ended the year in a deep recession. Nagy said that the government’s policies could pave the way for a potential 4% economic growth this year.
Looking ahead, the government is banking on pro-growth strategies, including boosting consumer confidence, maintaining high investment levels, and enhancing labor market participation, to counter the dismal end to 2023. With the European Commission unlocking significant EU funds and the government adjusting its deficit targets to support growth, there's a concerted effort to steer the economy towards a more favorable trajectory.
However, as Hungary navigates these turbulent waters, the pressing question remains: can it achieve the Cabinet's ambitious 4% growth target for the upcoming year, or will the lingering effects of last year's economic performance continue to pose significant hurdles? With analysts like Virovácz adopting a more conservative outlook, the path to recovery appears fraught with challenges, highlighting the need for robust and sustained efforts to reinvigorate Hungary's economic fortunes. “ING's more pessimistic GDP growth forecast of 3% is under threat given the economic performance at the end of last year, so we see clear downside risks to the growth outlook,” the economist noted.