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CIB: Inflation to Continue Falling in 2024 as Economy Grows

Analysis

Although global inflationary pressures are easing, GDP growth in advanced economies has slowed over the past six months. The Hungarian economy appears to be gradually emerging from the crisis, but the growth outlook for 2024 still looks subdued, according to CIB Bank analysts.

The Hungarian economy bottomed out in Q2 and then began a slow, gradual recovery. In Q3, Hungary’s Central Statistical Office (KSH) recorded an expansion of 0.9% compared to the previous three months, but on an annual basis, GDP still contracted by 0.3%. Output fell by 1.2% in the first three quarters, and the last three months will not be able to offset this fully. CIB, therefore, expects a contraction of around 0.5% for 2023 as a whole.

“Following the publication of the first estimate of Q3 GDP, we can say that the Hungarian economy bottomed out in the second quarter and then started a slow, gradual recovery,” said Mariann Trippon, chief economist at CIB Bank.

Household consumption should pick up again next year on the back of a rebound in real wages, a tight labor market and expected moderating financing costs. However, consumption is expected to recover only slowly and gradually after the shocks the sector has suffered in recent years.

CIB’s analysts say the outcome of the EU agreement is critical to investment trends. A positive turnaround, even a partial agreement allowing EU funds to flow, could boost both public and private investment. Nevertheless, limited budgetary space may continue to reduce public investment in the coming year.

CIB adds that the economic downturn has only moderately affected the labor market, with the Hungarian economy at virtually full employment. The shortage of skilled labor will continue to have an impact in the coming years. The unemployment rate has gradually crept up in recent quarters but has not risen significantly above 4%. As economic activity picks up, the unemployment rate is expected to resume its downward trend in the coming quarters, averaging 3.6% in 2024.

A tight labor market and increases in the minimum wage and the guaranteed minimum wage of 15% and 10%, respectively, will bring above-inflation wage dynamics next year, helping to restore household purchasing power. Average earnings in the economy as a whole could increase by around 10% in 2024, corresponding to a real wage increase of 4-5%.

External Balances

The reduction in imports for consumption and investment and the normalization of energy prices led to a rapid improvement in the country’s external position. In the first three quarters of the year, the external balance accumulated a surplus of EUR 6.85 billion, and the deficit could exceed EUR 8 bln in 2023. The improvement in the external balance is also reflected in the current account. Last year, the deficit exceeded 8% of GDP, but this year, the current account could close with a small surplus, which will increase further in 2024.

Inflation has eased from its peak in January, first at a slow pace and then more intensively in the fall months, helped by the high base. The consumer price index fell a shade below 10% in October and could end the year below 7%. However, average annual inflation could still be around 17.8%. In addition to the easing of imported inflationary pressures and a more stable forint exchange rate, the weakening of domestic demand also played a significant role in the moderation of the pace of monetary depreciation.

Disinflation could continue in 2024 but at a much slower pace. On the outlook, the forint exchange rate, global energy price developments, tight labor markets, strong wage outflows and the extent of repricing at the beginning of the year are upside risks. In all likelihood, the rate of monetary depreciation will average around 5% in 2024, and the annual price index will only slip back into the central bank’s target range of 2-4% in 2025.

In May, the National Bank of Hungary (MNB) started a slow, gradual normalization of interest rates, in line with the positive change in the country’s risk perception and declining inflation. As a result, in September, the gap between the base rate and the one-week deposit rate closed at 13%. In October, the MNB reduced the policy rate to 12.25% and in November to 11.5%. Another rate cut of 75 basis points is expected in December.

The interest rate path in 2024 may be determined by global risk sentiment, country risk perceptions, and the evolution of the forint exchange rate, in addition to the inflation outlook.

Data-driven Decisions

According to the forward guidance, the MNB’s Monetary Council will remain data-driven in the coming months, deciding on the actual steps to be taken step-by-step based on incoming data and particularly focusing on financial market stability. Assuming that market stability is maintained, easing could continue at a faster pace in the first months of next year and then more slowly for the remainder of 2024.

“Assuming that market stability is maintained, monetary easing could continue at a slower pace, with the baserate at 6-6.5% by the end of 2024,” Trippon added.

In a broadly supportive external environment in the first part of this year, the reduction in the country’s vulnerabilities and the high interest rate differential provided substantial support to the forint. The euro temporarily dipped to around HUF 365 in early summer, but appreciation has stalled since.

From the beginning of July, the cross rate moved in the range of 370-395, previously forecasted by CIB Bank’s experts; in mid-November, it moved closer to the lower boundary. By the end of 2024, CIB predicts the EUR/HUF exchange rate will climb to 384. On the other hand, they expect the USD/HUF rate to fall to just above 343.

CIB’s experts stressed that, despite positive developments such as falling inflation and improving external balances, the Hungarian economy remains vulnerable, for example, due to the fiscal situation and uncertainties surrounding EU funding. Therefore, if, for whatever reason, risk appetite in global markets declines, the impact of domestic weaknesses and the increasingly unattractive interest rate differential from month to month could push the exchange rate in a weaker direction, the analysts caution.

This article was first published in the Budapest Business Journal print issue of December 15, 2023.

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