Hungary’s economic growth bubble burst in the second quarter

Hungary’s economic growth bubble burst in the second quarterHungary’s economy contracted in the second quarter, keeping the country’s GDP on a zig-zagging course. Despite continued government optimism on the growth outlook, some analysts are lowering their GDP forecast for the year.

In the run-up to the release of second-quarter GDP, forecasts for the performance of the Hungarian economy were hugely mixed. Expectations regarding the quarter-on-quarter (QoQ) figure ranged from contraction to dynamic growth. The release of the Hungarian Central Statistical Office (HCSO) data proves that those who expected the economy to contract were the most accurate.

Gross domestic product fell 0.2% from the previous three months, according to preliminary data released by the statistics office this week. Despite the quarterly economic contraction, the year-on-year (raw) volume index improved from 1.1% to 1.5%, thanks to a low base last year. It is clear, therefore, that the improved yearly index is merely a statistical effect and not the result of real economic performance.

Over the past four quarters, the alternation between stagnation and dynamic growth has meant that the year's economic growth has been rather subdued. Given the current unfavorable data, the annualized dynamics of average quarterly growth over the past four quarters (seasonally adjusted annual rate) point to a rather subdued expansion of 1.3%.

Economy Minister Márton Nagy attributed the weak performance to struggling industrial exports to Western Europe, particularly Germany. He also mentioned upcoming budget proposals aimed at supporting small enterprises and families, with a target of over 4% economic growth.

The contraction comes after the government imposed new taxes and extended temporary ones to address a budget deficit that hit its full-year target in the first quarter. Additionally, the European Union has restricted access to some of Hungary's funds due to concerns over corruption and rule of law issues.

Despite the weak data, the government remains optimistic. Hungary’s economy could grow by 1.8-2.2% this year and 3.5% could be achieved “by all means” next year, the finance minister said. He said he was optimistic about the future, with all international forecasts showing significant growth in the Hungarian economy. The economy will expand in the second half, but developments in the US will be decisive, he added.

Analysts at ING Bank in Budapest said in a research note that the second quarter figure has drastically redefined Hungary’s growth outlook. “Based on the new data alone, we now expect the economy to expand by 1.5% instead of the 2.2% previously forecast. Moreover, this is only a technical change, i.e. the economic forecast for the coming quarters has not changed. This also makes it clear that the 2.2-2.3% economic growth expected for this year in the latest government communication would require a very strong recovery in the second half of the year,” they noted.

Meanwhile, the central bank signaled last week it intends to continue its more than yearlong cycle of interest rate cuts to spur growth. At 6.75%, the benchmark is tied for the highest key rate in the European Union, matching Romania’s.