Hungary’s GDP contracted and inflation spiralled upward in the second half of 2022 as the economy was exposed to higher commodity prices, weaker external demand and tighter financing conditions. Lower energy prices and an expected disinflation are set to trigger a gradual recovery as from the second half of 2023. The budget deficit is projected to remain elevated, reflecting high expenditure levels and the impact of lasting revenue-decreasing measures adopted in recent years.
| Indicators | 2022 | 2023 | 2024 |
|---|---|---|---|
| GDP growth (%, yoy) | 4,6 | 0,5 | 2,8 |
| Inflation (%, yoy) | 15,3 | 16,4 | 4,0 |
| Unemployment (%) | 3,6 | 4,2 | 4,0 |
| General government balance (% of GDP) | -6,2 | -4,0 | -4,4 |
| Gross public debt (% of GDP) | 73,3 | 70,7 | 71,1 |
| Current account balance (% of GDP) | -8,3 | -3,5 | -2,8 |
From recession to gradual recovery
Hungary’s economy entered into a recession in the second half of 2022, as the impact of higher energy prices and monetary tightening took hold. Investment fell, while consumption and export growth also slowed down. Real GDP contracted by 0.4% q-o-q in 2022-Q4, and monthly indicators point to a further drop in 2023-Q1.
Annual GDP growth is forecast to slow down from 4.6% in 2022 to 0.5% in 2023, and then pick up to 2.8% in 2024 supported by lower energy commodity prices and an expected disinflation. Consumption is projected to decline in 2023 but return to growth in 2024, driven by developments in real income. Investment is set to remain muted throughout the forecast horizon due to low demand, tight financing conditions and fiscal consolidation efforts. Exports are projected to slow down in 2023 but pick up in 2024, in line with external demand, and supported by ongoing FDI projects. On the other hand, weaker domestic demand is set to hold back imports throughout the forecast horizon, ensuring a positive contribution of net exports to GDP growth. The agricultural sector contributed negatively to growth by 1.1% of GDP in 2022 due to severe droughts, but the recovery of crop yields is set to boost GDP this year, mainly through inventory accumulation.
Higher energy prices worsened the current account balance to -8.2% of GDP in 2022. The recent fall of commodity prices and the moderation of import demand are expected to reverse this development, and the current account is projected to improve to -2.8% by 2024.
The labour market remains tight
Labour demand remained resilient during the economic slowdown of recent quarters and the unemployment rate rose only modestly to 4.1% in 2023-Q1. It is projected to rise to 4.2% on average in 2023, to then fall back to 4.0% in 2024. Shortages of skilled workers are expected to persist, exacerbated by population ageing. Nominal wage growth is set to remain robust, in line with limited labour market slack and high inflation. For 2023, wage growth is also boosted by a 16% minimum wage hike. Real wages are currently declining due to high inflation, but they are expected to rise again as from autumn 2023.
Inflation is expected to fall sharply in 2024
HICP inflation appears to have peaked at 25.9% in 2023-Q1, following the phase-out of the motor fuel price cap in December 2022. The inflation rate is set to ease in the subsequent quarters, driven by base effects, lower commodity prices, the recent currency appreciation and weak consumer demand. The annual average inflation rate is projected to increase from 15.3% in 2022 to 16.4% in 2023, and then drop to 4.0% in 2024. The forecast assumes that the price cap on certain basic food items is not extended again beyond June 2023, and that residential utility prices remain unchanged.
Downside risks to the growth outlook stem from a sudden increase in the country risk premium which might also constrain fiscal policy, and from the exposure of the economy to a potential spike in energy prices. Upside risks to inflation are related to a potentially looser fiscal policy stance, high wage growth in a tight labour market, and the de-anchoring of inflation expectations.
Persistently high budget deficits
The government deficit remained high at 6.2% of GDP in 2022, driven by pressures related to the energy crisis and expansionary policies adopted in the aftermath of the pandemic. In 2023, the deficit is projected to decrease to 4.0% supported by temporary sectoral and windfall profit taxes (reaching 1.5% of GDP in 2023), as well as by robust revenue growth fuelled by high inflation. Subsidies to utility companies to cover their losses on regulated energy prices are boosting current expenditures in 2023. The recent fall in gas prices is expected to lead to a reduction of these subsidies in the next heating season, mitigating their fiscal burden in 2024. The net budgetary cost of the energy support measures is projected in the Commission 2023 spring forecast at 1.2% of GDP in 2023, compared with 1.0% in 2022. The Commission currently assumes the net cost of energy support measures at 0.4% of GDP in 2024.
Despite the lower projected cost of energy measures and the improving macroeconomic outlook, the deficit is projected to remain high in 2024 at 4.4% of GDP. The revenue growth is expected to be hampered by the assumed phaseout of temporary taxes in line with their sunset clauses. Expenditure is set to remain elevated due to the rising debt-servicing costs and lingering spending pressures stemming from high inflation. Nationally financed public investment is assumed to remain at a level that covers the amortisation of the public capital stock. The Convergence Programme projects further cutbacks in nationally financed investment, which could result in a lower deficit. Upside risks to the deficit stem from the pressures on public sector wages, higher debt financing costs, and energy commodity prices.
Owing to high inflation and robust GDP growth, the debt-to-GDP ratio fell by 3.3 pps. to 73.3% in 2022. It is projected to decrease further to 70.7% in 2023, before rising again to 71.1% in 2024 due to a high deficit and slower nominal GDP growth.