Hungary’s economy remained in recession in the first half of 2023 causing a significant slippage in the 2023 budget and a correction of the external balance. Lower commodity prices and easing financing conditions are set to support a gradual recovery in 2024 and 2025. Inflation is receding from high levels, but brisk wage growth is expected to sustain underlying price pressures. The budget deficit is projected to remain elevated beyond 2023, reflecting the impact of lasting revenue-decreasing measures adopted in recent years.
| Indicators | 2023 | 2024 | 2025 |
|---|---|---|---|
| GDP growth (%, yoy) | -0,7 | 2,4 | 3,6 |
| Inflation (%, yoy) | 17,2 | 5,2 | 4,1 |
| Unemployment (%) | 4,1 | 4,2 | 4,1 |
| General government balance (% of GDP) | -5,8 | -4,3 | -3,8 |
| Gross public debt (% of GDP) | 69,9 | 71,7 | 70,3 |
| Current account balance (% of GDP) | 0,9 | 0,1 | -0,4 |
From recession to gradual recovery
Hungary’s economy contracted for four consecutive quarters, with real GDP falling by 2.4% y-o-y in 2023-Q2. High inflation, tighter fiscal and monetary policies and sluggish external demand contributed to the downturn. Quarterly GDP growth is estimated to have turned positive in 2023-Q3, thanks to the bounce-back in agricultural production from the severe droughts of 2022, and an uptick in industrial and construction activity.
Real GDP is expected to contract by 0.7% in 2023, but to gradually recover as inflation recedes, allowing the easing of the currently very tight monetary conditions. Real GDP growth is forecast to pick up to 2.4% in 2024, and further to 3.6% in 2025. Consumption is set to be supported by recovering real income growth and the easing of precautionary saving. Construction investment is projected to remain constrained by fiscal consolidation and high interest rates, but large FDI projects in manufacturing are expected to boost machinery investment. As these capacities enter production, they are set to gradually bolster Hungary’s export performance.
The external balance is improving sharply in 2023 owing to lower energy import prices and lower imports due to the economic recession. The current account balance is set to turn from a deficit of -8.2% in 2022 to a surplus of 0.9% in 2023. However, with the projected recovery of domestic demand the current account is forecast to revert to a small deficit by 2025.
Tight labour market with high wage growth
Employment has remained resilient in the first half of 2023, as companies were reluctant to shed workers in an environment of persistent labour shortages. The unemployment rate stood at a modest 4.1% in 2023-Q3, and it is projected to remain broadly flat in the next years. The tight labour market is set to sustain high nominal wage growth, further boosted by an expected double-digit minimum wage hike in 2024.
Inflation to remain elevated
HICP inflation has decreased substantially to 14.6% in 2023-Q3 and is bound to return to single digits in the next months, due to base effects, lower commodity prices and weak consumer demand. However, high wage growth is expected to keep service inflation persistently high. Although the aggregate profitability of the corporate sector appears high, smaller companies are assessed to be more financially stretched, thus they are more likely to pass wage increases on to consumers. The excise duty hike of motor fuels in January 2024 is estimated to add 0.5 pps. to inflation in 2024. The harmonised inflation rate is forecast to decrease from 17.2% in 2023 to 5.2% in 2024 and 4.1% in 2025.
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 high exposure of the economy to a potential spike in energy prices. Upside risks to growth and inflation are related to potential stimulus measures such as larger-than-expected minimum wage hikes.
High budget deficits persist despite improving outlook
The government deficit is projected to remain high at 5.8% of GDP in 2023. The higher-than-expected budget deficit is driven mostly by underperformance of revenue, in particular VAT, reflecting weaker-than-expected economic performance in the first half of the year, and higher spending on interest and pensions due to high interest rates and inflation.
Despite the improving macroeconomic outlook, a lower projected cost of energy measures, expected cuts in capital expenditure, and the postponed recapitalisation of the central bank, the deficit is forecast to remain elevated at 4.3% of GDP in 2024 and 3.8% in 2025. Revenue growth is expected to be hampered by the deficit-increasing impact of the permanent tax cuts since 2019 and the planned phasing out of the sectoral and windfall profit taxes in 2025, with an estimated impact of 0.7% of GDP. Growth of current expenditure is set to be restrained in 2024. High interest expenditure will weigh on the budget in the coming years due to high nominal interest rates and high coupon payments on inflation-indexed retail bonds. Nationally financed public investment is expected to fall substantially over the forecast horizon, while the EU-funded investment projects are set to accelerate. Subsidies to utility companies to cover losses from regulated energy prices are projected to fall, driven by moderating gas import prices. The net budgetary cost of the measures to mitigate the impact of high energy prices, including the windfall profit taxes collected from the energy sector, is projected at 0.8% of GDP in 2024, compared to 1.3% in 2023. Upside risks to the deficit stem from the persistence of high interest rates and inflation, exposure to energy commodity prices, and the subdued level of current expenditure, especially on wages.
Owing to very high inflation, the debt-to-GDP ratio is expected to fall by 4 pps. to 69.9% by end 2023. Debt consolidation is projected to slow down markedly thereafter due to persistently high deficits and slower nominal GDP growth. The debt ratio is set to reach 71.7% of GDP in 2024 and 70.3% in 2025