Hungary’s economy contracted by 0.4% q-o-q in the third quarter of 2022 as the impact of earlier fiscal stimulus faded and severe droughts hit agricultural production. Consumption and investment slowed down, inventories declined, while easing supply chain disruptions led to a pick-up in export growth. In 2022-Q4, a further decline in economic activity is expected as rising energy prices further weighed on domestic demand.
Economic growth is set to remain subdued in 2023 as the economy gradually adjusts to higher energy prices. Private consumption is projected to shrink at the turn of 2022/23 as high inflation squeezes households’ purchasing power. Investment is also expected to fall, driven by weaker demand, rising borrowing costs and fiscal consolidation efforts. Indicators of housing transactions and lending point to a downturn in the housing market, which is expected to limit construction activity further. While export growth is forecast to slow down in line with external demand, imports are set to do so even more, as domestic energy demand adjusts to higher prices. The external balance is thus expected to improve, also supported by the assumed moderation of energy commodity prices compared to 2022 levels. Economic growth is set to pick up gradually over the forecast horizon as inflation recedes and external demand improves. Real GDP growth is forecast to decrease from 4.9% in 2022 to 0.6% in 2023, before recovering to 2.6% in 2024.
HICP inflation increased to 25% in December 2022. Core inflation also continued to rise, reflecting broad-based price pressures from rising production costs, currency depreciation and indirect tax hikes in several sectors in 2022. The pass-through of higher costs and taxes is set to continue in 2023, and HICP inflation is projected to rise from an annual average of 15.3% in 2022 to 16.4% in 2023. The increase of administrative residential energy prices in August 2022 and the phase-out of the motor fuel price cap in December 2022 are set to add nearly 4 pps. to annual average inflation in 2023. Once the price level adjusts to higher costs, inflation is expected to subside to 4.0% in 2024, supported by the assumed moderation of commodity prices and the continuing weakness of consumer demand.
Hungary’s economic outlook remains sensitive to global investor sentiment. The country is also particularly exposed to energy price changes and potential supply disruptions due to its large dependence on energy imports and its limited scope for import diversification in the short term. Inflationary risks are tilted to the upside as inflation expectations might become entrenched at a high level.