Hungarian Economy no Longer Stagnating

Analysis

The first quarter GDP data surprised analysts, and was the second best in the European Union on a quarterly basis. As for the whole year, based on the better-than-expected figures, analysts now expect average growth of 2-3%; however, this is still fraught with uncertainty, mainly due to changes in external demand.

Hungary’s gross domestic product was 1.1% higher according to raw data and 1.7% higher according to seasonally- and calendar-adjusted and reconciled data in the first quarter of 2024 than in the same period of the previous year. Compared to Q4 of 2023, the economic performance was up by 0.8%, according to the seasonally- and calendar-adjusted numbers, fresh information published by the Central Statistical Office (KSH) shows.

According to the report, the main contributors to the increase in the economic performance were market services. A decrease in the added value of industry, which represents a significant weight in the national economy as a whole, hampered economic growth.

The data suggests the economy regained its strength in the first quarter, and the recovery process that stalled at the end of last year has started again, Erste Bank analysts Orsolya Nyeste and János Nagy comment.

Although consumption might pick up as well as a result of lower inflation and higher real wages, the question is to what extent it will remain within the country’s borders and how much the motive of caution, which has intensified due to the welfare losses of the past year and a half, will be resolved. As for the whole year, the experts expect economic growth of 2%.

Positive Contributions

“Although the KSH has not yet published detailed data on the first estimate, it can be guessed from the consumption side that both consumption and investments may have contributed positively to the expansion,” Gábor Regős, head analyst at fund management company Gránit Alapkezelő, says.

According to him, consumption was greatly helped by the fact that real earnings rose by around 10% in the months most relevant to consumption in the first quarter (between December and February), meaning there was more to consume, even if the motive of prudence and the high price level hindered this higher consumption.

“It is also worth adding that the purchasing power of pensions not only remained at the same level but also increased slightly. In order for consumption to increase, it was also necessary for inflation to normalize; this happened roughly in the first quarter,” Regős adds.

He thinks the economy seems to be gradually returning to the growth path after the stagnation of the previous quarter. However, the contribution of exports is difficult to estimate, and the weak industrial data predicts an unfavorable performance. The development of external demand is still not yet there to help the expansion of the economy.

According to Péter Virovácz, senior analyst at ING Bank, the Hungarian economy has continued to zig-zag, with stagnation and dynamic growth alternating in the past four quarters. He says that after the negative surprise of the previous quarter, we can now speak of a slight positive surprise.

Above Expectation

The senior analyst says the market expectation was an increase of 0.5% on a quarterly basis rather than the 0.8% the KSH recorded for the first quarter of this year. In addition to last year’s low base, the annual base growth has also improved significantly, Virovácz points out. It is also important to note that the seasonal effect was much stronger than usual, he adds.

“The latest data is in line with our forecast for 2024,” MBH Bank’s senior capital market analyst Márta Balogh-Béki writes in her commentary. “We expect economic growth of more than 2% from the second quarter on a year-on-year basis. The economy may expand by 2.7% this year as a whole.”

She thinks the main driving force behind this year’s growth is the replacement of delayed consumption, which is supported by the recovering real wages. The EUR 12.2 billion in EU funding released (representing roughly a third of the EU funds), which started gradually arriving from the beginning of this year, might also provide support, mainly through investments.

In a Facebook video, Minister of Finance Mihály Varga talked about how growth was helped by the fact that employment is at a record level, real wages are rising, consumption has started, and the construction industry and tourism are also performing better.

According to his expectations, the Hungarian economy may expand by 2.5% throughout 2024. Next year, according to the forecasts of the European Commission and the International Monetary Fund, it may be at the top of the EU growth ranking.

The Second Best

The EU’s statistical office, Eurostat, has also published seasonally adjusted data for the member states. Compared to the previous quarter, Ireland achieved the best growth of 1.1%, followed by Lithuania, Latvia and Hungary: all three countries are at the top of the field with a growth rate of 0.8%. Spain closely follows, with a growth rate of 0.7%. Belgium maintains a stable growth rate of 0.3%, placing it sixth among the best performers. Sweden’s economy shrank by 0.1%, while Austria, Germany and France all expanded by 0.2% only. The EU and Eurozone growth averages both showed a 0.3% increase.

This article was first published in the Budapest Business Journal print issue of May 6, 2024.

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