Analysts Warn of Slight Recession on the Horizon


The Monetary Council has kept the key interest rate at 13%, which is not expected to change any time soon. Meanwhile, some analysts already see worsening outlooks for Hungary’s economy.

The current level of the key interest rate in Hungary is sufficient for addressing inflationary risks, therefore modifying it is not on the agenda, National Bank of Hungary deputy governor Barnabás Virág told a press conference on July 25, following the rate-setters meeting of the Monetary Council of the National Bank of Hungary (MNB).

For the time being, it would be too early to signal anything in this regard before September. He added that it is still necessary to maintain strict monetary conditions to achieve price stability.

At its meeting on Tuesday, the council did not change the base interest rate of 13%, but it did further narrow the interest corridor, the upper edge of which will decrease by 100 basis points from 18.5% to 17.5%. The lower end of the range remains at 12.5%.

Virág pointed out that, in line with the central bank’s expectations, the deflation rate will continue to accelerate, and the indicator will be “perceptibly” below 10% by the end of the year. The goal is for disinflation to continue in 2024, with the projected numbers to be included in September’s Inflation Report.

The favorable risk environment enables the MNB to continue the normalization of the interest rate environment at the previous pace, the deputy governor emphasized. The rate of disinflation continues to accelerate and is being felt more widely; prices have decreased in about one-third of the entire consumer basket on a monthly basis, Virág pointed out, indicating that this trend will continue in the coming months. He opined that with the rapid decrease in inflation, the retrospective real interest rates may become positive already in the fall.

Convergence the Focus

The overnight rapid tender rate and the gradual convergence of the base rate remain the focus of the monetary policy, Virág says. The deputy governor described the domestic financial market situation as stable but warned that the volatile international macroeconomic and market environment still requires a cautious approach.

Among the internal factors, the balance of the current account continued to improve, while inflation and core inflation are expected to decrease further, according to Virág.

“There are fluctuations in the mood of international investors, and the Russian-Ukrainian war also causes constant uncertainty. According to our current knowledge, the rate hike paths of the major central banks are coming to an end,” he said.

Something has moved in the Hungarian economy going into the third quarter, according to Virág. While he emphasized that we were still “below the line,” there are signs of a turnaround, so that growth could be seen in the second half of the year.

“An important pillar of economic growth will be the repeated increase in real wages, as this statistic may return to the positive range again in the coming months,” he said.

While this all sounds relatively upbeat, some analysts have, in the meantime, started to paint a darker picture of the Hungarian economy. For one, BNP Paribas released its revised forecast for the country, in which it emphasized the soft domestic demand.

Negative Growth

The report recalls that the Hungarian economy posted negative growth in the last three quarters. Real GDP fell by 0.3% on a quarterly basis in the first quarter, following -0.6% in Q4 2022 and -0.8% in Q3 2022. Domestic demand is losing momentum and is mainly responsible for this. Household consumption and destocking contributed negatively to GDP growth. By contrast, analysts at the bank write that net exports improved in Q1 but were insufficient to offset the weakening domestic demand.

They also mention that this year, Hungary may underperform compared to its neighbors in Central and Eastern Europe. Inflation, which is much higher in the region, will still impact negatively on growth, as wages have been rising more slowly than consumer prices since August 2022.

Furthermore, the level of interest rates is not favorable to demand for new loans. Besides, fiscal policy will provide relatively weak economic support, given consolidation efforts introduced since the summer of 2022. The authorities’ target is to reduce the budget deficit to 3.9% of GDP in 2023 and then to 2.9% in 2024, although, at first glance, this seems optimistic, particularly for 2023.

As a result of the above, prospects for an improvement in economic activity are weak in the short term. High-frequency indicators, such as industrial production, retail sales and the significant purchase intentions of households for the current and future period, have deteriorated in recent months. Production fell by 3.6% on a yearly basis in April, after reaching -2.9% and -1% in previous months. The drop in retail sales was more pronounced (-12% year-on-year in April, -12.7% in March and -8.4% in February). Notably, industrial production and retail sales fell below their pre-COVID level in April.

The analysts also mention that Hungary has by far the highest inflation rate among countries in the European Union. In May, it stood at 21.5% y.o.y. compared with an average of 10-15% in the region.

In light of the above, BNP Paribas expects an economic decline of 0.2% rather than the 1.5% growth expected by the Hungarian government. According to analysts in France, there is a chance of a 3.1% GDP expansion in 2024, while the cabinet hopes for 4%.

Morgan Stanley also expects a GDP contraction, noting that the Hungarian economy is expected to show weak GDP growth in the second quarter of 2023, as both domestic and external demand will remain subdued.

This article was first published in the Budapest Business Journal print issue of July 28, 2023.

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