Hungary Slips into Technical Recession

Analysis

Economic performance in the fourth quarter of 2022 diminished by 0.4% compared to the previous three months, marking the second quarter of negative growth, the financial dictionary definition of a technical recession. For the whole year, however, Hungary’s gross domestic product growth was a relatively high 4.6%.

Hungary’s GDP increased by 0.4% according to raw data and by 0.9% according to seasonally and calendar-adjusted and reconciled data in the fourth quarter of 2022 compared to the corresponding period of the previous year, the latest data published by the Central Statistical Office (KSH) shows.

Compared to Q3 2022, the economic performance diminished by 0.4% according to seasonally and calendar-adjusted and reconciled data. For the full year of 2022, the volume of GDP grew by 4.6%.

While many economic sectors contributed to the year-on-year increase, industry and market services did the most part. There was significant growth compared to a year earlier, especially in the manufacturing of motor vehicles, trailers, and semi-trailers, as well as electrical equipment, within industry. Among market services, the expansion was predominately in real estate activities, as well as transportation and storage. A considerable downturn in agriculture slowed the overall increase.

Last year’s high data can be attributed to three significant factors: the vigorous recovery from the coronavirus crisis and the strong election spending in the first half of the year persisted; also, the Hungarian economy started 2022 with a higher output level than the average performance of 2021 (the so-called statistical carry-over effect).

These two driving forces were restrained in the second half of the year by the ever more potent effects of the energy crisis and the disappearance of the impact of the government’s pre-election spending.

Below Average

Compared to the European Union, Hungary’s GDP growth was below the EU average in the fourth quarter of the last year. Indeed, for that period, the Hungarian economy was the fifth worst-performing in the EU, according to the latest data from Eurostat. However low down the league table it was, though, it still performed much better than the two worst-performing countries (Lithuania, with minus 1.7, and Poland at a minus 2.4 “growth rate” in Q4).

Compared to the same period of the previous year, Hungarian growth was the sixth worst.

While the performance of the economy is decreasing again, the extent and intensity of the contraction cannot be compared with the pandemic period (in 2020, the economy shrank by 4.8% on an annual basis). Nevertheless, the country is thus entering a technical recession for the second time in three years.

The outlook is not so shiny either, according to some analysts. Fitch Solutions (part of Fitch Ratings Inc.) expects a decline of 1% for the whole year in 2023. The rationale for this negative assumption is that while the growth in 2022, especially in the first half, was boosted by the massive expansion of monetary and fiscal incentives, this year, a significant reduction in government spending is likely. Especially since, in its opinion, Hungary’s EU subsidies will continue to be withheld by the European Commission.

While Fitch paints a rather dark picture, others are more optimistic. S&P Global Ratings (previously Standard & Poor’s) predicts 0.3% annual GDP growth. The European Commission expects a 0.6% increase for 2023, as stated in its winter forecast. The Hungarian government is the most bullish and foresees a 1.5 expansion.

Grounds for Optimism

As a result of the current relatively lower energy prices (which have fallen significantly compared to last year), sectors that are proving to be more resilient than expected, the better-than-expected European outlook, the recovery of supply chains, and the reopening of the Chinese economy after the abandonment of its zero-COVID policy, the turning point in growth may occur sooner than previously thought. Thus, the slowdown in the economy may also be milder than current expectations, according to Magyar Bankholding’s senior analyst Gergely Suppan.

It is questionable whether the domestic economy can leave the technical recession behind as quickly as by the end of the first quarter, but it may significantly accelerate from the second quarter on due to “hibernating” businesses reopening following the end of the heating season, he says.

In the second half of the year, real wages are expected to rise again as a result of falling inflation. From the end of the year, investments could pick up again due to the expected falling interest rates. That and the new industrial capacities that will be created during the year could also support growth.

Next year’s growth can also be supported if the extreme drought of 2022 is not repeated, meaning agriculture could also make a significant contribution.

“Due to the improved outlook, we can slightly improve our growth forecast to 0.8% this year,” Suppan says. ING Bank is in similar territory with its own analysis.

“As we have no high-frequency data releases yet for early 2023, we maintain our 0.7% GDP forecast for 2023 unchanged,” says analyst Péter Virovácz. “But to achieve that, the Hungarian economy must produce significant growth within the year,” he cautions.

“According to our estimates, this year, the economy must deal with a -0.5% carry-over effect. Nevertheless, the 0.7% full-year growth can be achieved. Currently, we see a realistic chance that GDP will shrink on a quarterly basis in the first quarter of 2023 on domestic demand, after which the economic recovery and catch-up to the pre-crisis GDP level can begin,” Virovácz adds.

This article was first published in the Budapest Business Journal print issue of February 24, 2023.

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