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Recession Continues, Outlook Remains Uncertain

Analysis

Hungary, for the third time in a row, reported a drop in GDP in the first quarter of 2023, meaning the technical recession that started in H2 2022 has continued into this year.

Not entirely surprisingly, the technical recession in Hungary continued in the first quarter of 2023 as gross domestic product for January-March saw a 0.2% contraction. This marks the third quarter of sequential contraction in the volume of GDP, with high uncertainty regarding the next quarter, according to analysts.

As the latest data released by the Central Statistical Office (KSH) shows, Hungary’s GDP decreased by 0.9% according to raw data and by 1.1% according to seasonally and calendar adjusted and reconciled data in the first quarter of 2023, when compared to the corresponding period of the previous year.

Compared to Q4 of 2022, the economic performance diminished by 0.2% according to seasonally and calendar-adjusted and reconciled data. The most significant contributor to the decrease in performance was industry, though the good figures from agriculture and services moderated the decline. The main contributor to the growth in services was health activities, approximating the level before the coronavirus pandemic, KSH says.

Despite the not-so-good news, the Hungarian government remains optimistic about the future. According to a note released by the Ministry of Economic Development, the drop in economic performance is only “temporary” and mainly due to “war inflation” and the sanctions the EU has imposed on Russia.

“Despite the temporary setback in GDP, economic growth of 1.5% can be maintained,” the ministry insisted in its note.

According to the government’s expectations, the decline in economic performance has reached its lowest point at this level, and due to the targeted measures, more favorable growth processes will already be observed in the second quarter of the year. In the second half of 2023, a new, more radical growth phase will begin so that the Hungarian economy can take off again, the government anticipates.

Long but Shallow

However, the Hungarian recession has been the longest in the EU: in the third quarter of 2022, the decline was 0.8%, in Q4 it was 0.6%, and now 0.2%. The good news is that the Hungarian recession, despite its extension into three quarters, cannot be called deep.

As this was a preliminary release by the KSH, there is no detailed data yet, analysts at ING Bank point out.

“We will assess the factors contributing to the decline in real GDP once we have the complete picture on June 1, when detailed data is released,” the bank analysts say.

“However, the KSH highlighted that the largest contributor to the decrease in economic performance was industry. This is hardly surprising given that industry posted 6-10% year-on-year declines in production volumes throughout the first quarter,” they note.

The positive performance of agriculture was also emphasized, but ING analysts think the outperformance is more attributable to technical base effects rather than actual economic performance. The positive contribution this time can be attributed to the comparison with last year’s drought-related exceptionally poor performance, resulting in a low base effect.

“Going forward, the lack of monthly economic data for the second quarter limits our ability to predict whether the technical recession will continue or not. In this regard, the detailed release on June 1 might give us some clues. However, given sky-high inflation and the depletion of household savings, meaningful domestic consumption in the second quarter seems unlikely,” the ING analysis reads.

The bank also emphasizes that investment activity is rapidly collapsing due to the high interest rate environment; thus, from a GDP contribution point of view, both components will likely drag on growth.

Silver Lining?

“The only silver lining could be net exports; however, judging by the recent underperformance of industry, we see little chance for an early rebound in the second quarter. In our view, judging by the data available now, it would be considered a positive surprise if the economy manages to avoid a quarterly downturn,” ING concludes.

As for the year as a whole, currently available data suggests a modest annual growth rate of 0.2%, followed by approximately 3% GDP expansion in 2024. However, should the technical recession extends into the second quarter of this year, a downgrade to zero or even into negative territory may be unavoidable, ING analysts warn.

At the same time, the European Bank of Reconstruction and Development improved its forecast for the Hungarian economy, its forecast being released on the same day the first quarter GDP data was out. In its latest Regional Economic Prospects, EBRD said Hungary’s economy could grow by 0.4% this year, a slight but notable improvement from its February forecast, when it predicted a 0.2% decline.

The EBRD said GDP growth would slow this year, from 4.6% in 2022, as household purchasing power declines amid high inflation and government consumption shrinks due to budgetary restraint. FDI inflows and other private investments are expected to support GDP growth this year, “but EU funds, especially those from the RRF, will likely reach Hungary only in late 2023 or 2024,” it added.

The EBRD then sees Hungary’s GDP growth picking up to 3.5% in 2024 as external demand improves and real incomes recover.

However, to put the Hungarian economy into its European context, in terms of growth compared to the previous quarter, Hungary’s Q1 data was the fourth worst in the EU and the second worst on an annual basis.

This article was first published in the Budapest Business Journal print issue of May 19, 2023.

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