Hungary’s economy shows signs of impending recession

Hungarian economic growth continued to slow in the third quarter of the year. Analysts expect further weakness in the coming couple of quarters as negative impacts amplify the drag on growth

Economic growth in Hungary slowed from 6.5% in Q2 to 4% in July-September on an annual basis, below forecasts. The nation’s economy contracted 0.4% compared to the previous quarter, recording the first drop since 2020.
Adjusted for working days, GDP grew 4.1% from a year earlier as all branches of the economy, except agriculture, contributed to headline growth.

Technical recession in sight
Economic performance in the third-quarter was held back by a sharp decline in agriculture, on the back of a poor maize harvest, according to a press release from the Central Statistical Office. For the first time in living history, Hungary may have to rely on imports to cover its domestic needs.
“The two biggest difficulties Hungary is facing – higher energy bills and increasing unemployment – did not fully affect the economy in the third quarter. Nonetheless, the 0.4% quarter-on-quarter drop in real GDP means that we have already seen the first leg of the expected technical recession in Hungary,” according to analysts at ING Bank in Budapest.
While the 2022 full-year growth could be closer to 5%, next year’s outlook is gloomier. There is consensus that Hungary will fall into a technical recession in the last quarter as the economic outlook deteriorates and consumers cut back spending amid runaway food and energy prices. Real wage growth moved into negative territory in September, while new mortgages also dropped.
The government’s decision to delay several public investments will weigh heavily on capital expenditures and Hungary’s export-oriented electronics and automotive sectors could see the impact of the slowdown at its major foreign markets in the EU. In the corporate sector – in both manufacturing and services – a significant number of companies are going out of business or reducing working hours due to skyrocketing energy costs. Big data also suggests the economy has been on a downtrend, which will show up in fourth-quarter GDP data. ING expects GDP to contract by 1.0-1.5% on a quarterly basis in the last three months of 2022.
The market sees Hungary’s economy bottoming out in the first quarter of 2023 and a significant improvement is expected from the second quarter, supported by improving purchasing power as inflation eases and interest rates retreat. New capacities in the industry could lift output if the global economy recovers faster than expected, analysts said.
In light of the latest GDP data, ING expects a positive zero (0.1-0.2%) GDP growth on average in 2023. This forecast assumes that Hungary will be able to close the Rule of Law procedure and meet much-needed milestones to get EU transfers, which will start supporting the real economy during late 2023.
Magyar Bankholding cut its growth forecast to below 5% from 5.3% but left its 2023 target unchanged at 0.4%. The European Commission in a recent report raised its 2022 guidance from 5.2% to 5.5% but cut its 2023 estimate to 0.1% from 2.1%. The Commission noted that the forecast is based on the assumption that Hungary reaches an agreement with the European Commission on the release of EU transfers, which could support the economy from H2 2023.