After strong economic growth in the first half of 2022, Hungary’s economy is adjusting to higher commodity prices and tighter financing conditions, resulting in a sharp economic slowdown and high inflation in 2023. Fiscal policy is set to cushion the decline of household income and help to avoid a contraction of the economy, but at the cost of persistently high budget deficits.
Last update (forecast)
|GDP growth (%, yoy)||7,1||5,5||0,1||2,6|
|Inflation (%, yoy)||5,2||14,8||15,7||3,9|
|General government balance (% of GDP)||-7,1||-6,2||-4,4||-5,2|
|Gross public debt (% of GDP)||76,8||76,4||75,2||75,1|
|Current account balance (% of GDP)||-4,0||-7,6||-6,3||-4,3|
A sharp slowdown is expected
Hungary’s economy maintained strong momentum in 2022-Q2 with GDP expanding by 1.1% compared to the previous quarter. However, confidence indicators have deteriorated and monthly data point to weakening consumption, housing transactions, construction activity and lending. Higher inflation and energy prices, as well as tighter financing conditions, are set to constrain economic activity in the coming quarters, with real GDP growth projected to slow down from 5.5% in 2022 to 0.1% in 2023 and recover only to 2.6% in 2024.
Consumption is set to decrease in 2023 as household income is eroded by high inflation. However, households remain partially shielded from rising energy prices and financing costs through administrative caps on residential energy prices and mortgage rates. Investment is also projected to fall next year, squeezed by tight financing conditions and the deteriorating economic outlook. At the same time, corporate investment in energy efficiency is set benefit from government support. Building investment is set to decline particularly as the real estate market is expected to cool and fiscal consolidation measures reduce the volume of public investment from previous high levels.
Weaker external demand is projected to constrain export growth even though supply chain disruptions have eased somewhat. Rising energy prices are expected to increase Hungary’s net energy imports by some 5% of GDP between 2021 and 2023. Non-energy imports are set to remain muted, in line with the slowdown of final demand. Consequently, the current account deficit is projected to widen and peak at 7.6% of GDP in 2022, and then gradually narrow to 4.3% in 2024.
This baseline forecast is fraught with downside risks. Energy supply disruptions could have a large economic impact as Hungary has limited possibilities to substitute oil and gas imports from Russia in the short term. High energy prices might also endanger the medium-term investment plans of Hungary’s energy intensive manufacturing sector. Finally, persistently high inflation or deteriorating financing conditions might require a tighter economic policy stance.
Real wages to fall instead of employment
The labour market was robust in the first half of the year, with unemployment falling to 3.3% and nominal wages growing by 14.9% in 2022-Q2. Recent monthly data point to rising unemployment in line with the economic slowdown. However, due to shortages of skilled workers, companies are expected to hold on to their employees, which is set to limit the rise in unemployment. At the same time, high inflation is projected to reduce real wages in 2023.
Non-energy inflation is also running high
HICP inflation accelerated to 20.7% in September after the price cap on residential energy was partly lifted. Non-energy inflation was the highest in the EU at 19.2%, due to domestic inflationary pressure and currency depreciation. Inflation is set to remain high, at 14.8% in 2022 and 15.7% in 2023, before easing to 3.9% in 2024. This forecast assumes that the motor fuel price cap expires in January 2023, adding some 2 pps. to inflation in 2023. Second-round effects due to the tight labour market are an upside risk to the inflation path.
Public finances enter a challenging period
In 2022, the deficit is forecast to remain high at 6.2% of GDP despite robust revenue growth in the first half of the year. The introduction of several expansionary measures at the beginning of the year and increased spending in response to high energy prices are forecast to put pressure on the public finances in 2022 and beyond.
The deficit is expected to narrow to 4.4% in 2023 before rising again to 5.2% in 2024. The lower deficit in 2023 is driven by additional windfall profits and sectoral tax revenues (reaching 1.4% in 2023), which are set to be largely phased out in 2024, and the impact of the purchase of gas stockpiles by a special governmental entity. Upon the planned sale of these stockpiles in early 2023, the government is set to record additional revenue leading to a lower deficit in 2023 (by 0.6% of GDP).
Current expenditure is set to grow rapidly, especially in 2022 and 2023, driven by high inflation and expenditure on the utility bill protection scheme that subsidises utility companies for the losses incurred due to caps on residential energy prices. The total budgetary cost of measures to mitigate the impact of high energy prices - net of revenue resulting from the new taxes on windfall profits of energy companies - is estimated at 0.9% of GDP in 2022, 2.5% in 2023 and 1.8% in 2024. Capital expenditure is set to moderate over the forecast horizon due to the postponement of public investment projects.
Public debt is projected to decrease slightly from 76.8% of GDP in 2021 to 75.1% in 2024. The sharply worsening financing conditions are projected to increase the debt-servicing costs substantially, from 2.3% of GDP in 2021 to 3.4% in 2024. In the absence of a Council Implementing Decision approving Hungary’s RRP, this forecast builds on technical assumptions and includes expenditures planned to be financed by RRF grants, amounting to 0.4% in 2022, 0.7% in 2023 and 0.8% in 2024.
Risks to the fiscal outlook are on the downside, stemming from potentially large central bank losses and uncertainty surrounding financing conditions.