Hungary’s Technical Recession Longest on Record

Hungary unexpectedly plunged deeper into recession, recording the longest period of economic contraction in at least 28 years as the war in Ukraine and the government’s economic policy stifle growth. Despite government statements to the contrary, economists are warning that growth may not pick up in the second half of the year, leading to a full-year GDP contraction in 2023.

The Hungarian economy has been in a technical recession since the third quarter of 2022, as sky-high inflation, the war in neighboring Ukraine and the government’s policies stifle economic activity. The latest GDP figures for the second quarter published by the Hungarian Central Statistical Office confirm that the technical recession has continued even though the market expected modest growth in the March-June period. Economic output has now contracted for four consecutive quarters, the longest streak of technical recession since at least 1995 when the current GDP calculation system was introduced.
Hungary’s economy shrank 0.3% from April to June compared with the previous three months and 2.4% from a year earlier, the statistics office said this week.
“To put things in perspective, even during the Great Financial Crisis of 2008-2009, three quarters of contraction were followed by one quarter of stagnation. This time around, the volume of GDP contracted by 0.3% Q-on-Q in the second quarter of 2023, contrary to widely expected growth. This makes the current cost of living crisis the longest technical recession on record,” remarked economists at ING Bank in Budapest in a research note.
In the first half of the year, the government went on a pre-election spending spree with generous handouts to families and massive public investments. It stepped on the brake as a twin deficit widened due to soaring energy prices and the budget became overstretched. In an effort to plug budget holes, the Cabinet levied windfall taxes on a number of sectors, cut back housholds’ energy subsidies, and postponed a series of public investments.

Government optimism
Hungary’s Finance Ministry, which expects modest growth of 1.5% for this year, remarked in a statement that, “the fundamentals of the economy are stable.” Employment remains at record levels, the unemployment rate is one of the lowest in the European Union, the performance of agriculture and foreign trade is strong, and inflation is on a downward path,” the statement said. Minister of Economic Development Márton Nagy noted that “the [Ukraine] war and sanctions have adversely affected the performance of the Hungarian economy, as they have caused a drop in consumption and a slowdown in investments. But the negative external economic environment, including the stagnation of the German economy, didn’t help either.” The minister added that he expected “a rapid rebound” in the third and fourth quarters.
Economist don’t necessarily agree. “With GDP volume falling by 1.7% in the first half of 2023, the government’s full-year growth forecast of 1.5% seems utterly unrealistic given the year-to-date performance and still negative real wage growth,” the ING economists said, adding that the aim of the government seems to be to avoid a full-year recession rather than to fight for the 1.5% GDP growth.
“In our view, this is a very important and positive message, especially from a fiscal perspective, as it limits the risk of newly announced stimulus measures in order to support the unattainable 1.5% economic activity,” they concluded.