“[We expect] a happier and more successful year to come, […] economic growth of around 4% is not merely wishful thinking, but a fairly likely scenario, based on real analysis,” Minister for National Economy Márton Nagy told website Index in an opinion piece published on Jan. 3.
Last year had been “especially a year of fighting inflation,” Nagy said, reiterating the government line that this was down to “the impacts of the war and the flawed sanctions” imposed by the European Union. Ultimately, though, Hungary had “succeeded in defending the work-based and pro-family regime that constitutes the very basis of our economic and social system.”
In this regard, the minister alluded to (though he avoided citing the numbers) Prime Minister Viktor Orbán, who told pro-government television channel TV2 shortly before Christmas that, while the government had planned for inflation at 6% in 2024, “it now seems more likely that inflation will be lower, even as low as 5%.”
In the same interview, Orbán was even more optimistic about the economy than his minister.
“My feeling is that we are on a good path,” he said, predicting growth would accelerate to approach “the average annual growth of around 5% experienced in previous years,” all helped by a “dynamic increase of the minimum wage and guaranteed wage minimum by 15% and 10% respectively.”
Nagy was equally buoyant on wages, saying the rise in real wages had resumed in September last year and, as an essential pillar in the return of economic growth, would accelerate to near “the average annual growth of around 5%.”
Such real wage growth was essential, he said to fulfil both the government’s number one aim of supporting the welfare of Hungarian families and to restore levels of retail consumption after the decline in the past year.
Not all observers are as sanguine on the immediate economic outlook, however. Indeed, Hungary’s own Fiscal Council was unusually critical in its analysis of the 2024 budget, warning that it contained “major risks,” website Portfolio reported on Jan. 5.
In particular, the council predicted that economic growth would likely be slower than expected, with 3% a more realistic target, and that the state debt would not shrink relative to GDP.
Although this latter figure had fallen from 79.3% in 2020 to 73.9% in 2022, and the decline continued last year, to maintain this trend, the government needs to reduce the budget deficit significantly or boost real GDP growth. However, to achieve higher growth, Hungary needs “comprehensive reforms” to improve competitiveness and increase productivity, the council argues.
In its first analysis of the year, OTP Bank focused on the budget deficits for both 2023 and 2024. It now predicts that last year’s deficit, which struggled with lower-than-expected VAT returns as consumer spending slumped, will amount to 5.9% of GDP, higher than the 5.2% deficit target set in October but in line with the end-year revision of the government.
However, this figure will be primarily achieved by last-minute adjustments, namely an unexpected dividend payment of HUF 309 billion (equal to 0.4% of GDP) paid into state coffers in November by MVM, the state-owned electricity company, and a reduction in the planned energy subsidies of some HUF 450 bln (equal to roughly 0.6% of GDP).
Without these significant injections, the budget deficit would have been very close to the 7% of GDP figure predicted by the bank last fall.
OTP has also voiced doubts about this year’s official deficit target of 2.4% of GDP, warning that the figure is more likely to be in the range of 4-5%.
It notes that following the significant cut-back on investments this year, a second round of cuts, as envisaged in the budget, will be more challenging to implement.
In addition, the wages of public employees, including teachers, failed to match inflation last year and will have to be compensated for in the near future.
Moreover, consumption has not rebounded as well as expected, which has a negative effect on the VAT tax base in 2024, and interest expenses on state debt could well be higher than expected, depending on the evolution of interest rates during the year.
“The above risk factors are intensified by the debates in the government concerning how fast the deficit should be brought down below the 3% threshold. As a result, it is questionable if the adjustments will be made during the year to keep the 2.9% deficit target,” Gergely Tardos, chief economist at OTP Bank, comments.
Nor is the government’s propensity to overspend likely to be curbed by pressure from the European Commission, Tardos argues, which, given the general economic weakness in the European Union, is likely to continue taking a lenient approach to state spending.
“The commission is also not likely to demand [Hungary] reach the 3% threshold in 2024 in an excessive deficit procedure following the high shortfall last year; instead, it is expected to advise a more gradual deficit reduction plan and to reach the Maastricht criteria later,” Tardos concludes.
Indeed, iBanFirst, a French-owned financial services company based in Belgium, points to what it terms the current “fragility of the European economy” caused by a delayed post-COVID economic recovery, an ongoing energy crisis, and declining exports.
A recession in Western Europe will hit Hungarian manufacturing exports. As iBanFirst warns, even the threat of that will lead to an increased risk of exchange rate fluctuations, making planning for Hungarian exporters more complex and more costly.
Such uncertainties seem to have affected the thinking of the Hungarian on the street (or, in this case, on the waiting concourse of Budapest’s Déli railway terminus) as experienced by the Budapest Business Journal prior to deadline, with passengers picked at random expressing doubts as to the government’s optimism.
“I’d like to believe it all, but these [government forecasts] are just that, forecasts,” student Mátyás Kovács told the paper while waiting for the train home towards Balaton. “We have to see if they are actually realized.”
This article was first published in the Budapest Business Journal print issue of January 12, 2024.
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