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Recession is Over, Slow Recovery Ahead

Analysis

October has finally brought the much-awaited single-digit inflation figure, and the third-quarter GDP data was also good news. For all that, 2023 might be considered a “lost year.” As for the 2024 outlook, analysts’ opinions vary greatly. They agree, however, that while the worst has been left behind, a difficult and lengthy recovery is still ahead.

In the third quarter of 2023, Hungarian GDP increased by 0.9% compared to the previous quarter, thus ending the recession of the economy. Performance was 0.3% lower than a year earlier, however. Analysts had previously expected that the growth would be 1.1% on a quarterly basis and the decline would be 0.1% annually; compared to these expectations, the Central Statistical Office (KSH) data proved slightly disappointing.

Analysts agree this year cannot be considered a good one (one even called 2023 a “lost year”). KSH stated that, measured on an annual basis (seasonally and adjusted for calendar effects), industry and market services (and within the latter primarily trade) and scientific, technical and administrative activity played the biggest role within the 0.3% decline. The good performance of agriculture moderated the decrease.

Overall, the fresh data indicates that the Hungarian economy has come out of the technical recession that started in the summer of 2022.

“Consumption was restrained in the first half of the year by falling real wages, but in the second half of the year, due to the easing of inflation, real wages are expected to show growth again, so consumption can gradually pick up and help the recovery of growth,” MBH Bank senior analyst András Horváth comments.

According to the analyst, domestic and European prospects are supported by energy prices that have stabilized significantly lower than before. Still, they are overshadowed by slowing internal and external demand due to the war in Ukraine and high global interest rates.

“It is favorable that the order book for industry continues to show growth, and new processing industry capacities are gradually contributing to that. The growth prospects are also supported by net exports, as the import volume continues to decrease due to lower domestic consumption, among other things, while exports represent a moderate positive factor despite the weakening of external demand,” Horváth says.

MBH Bank expects a 0.1% decline for 2023 and a dynamic 4% growth next year.

Worst is Over

“The worst is already over, but the recovery will be long and difficult,” says Péter Kiss, investment director of the Amundi fund management company.

“Household consumption is expected to reach its lowest point in the second quarter, and a gradual improvement is expected due to falling inflation and positive real wage growth as a result. With a stable forint exchange rate, continued monetary easing can strengthen positive economic expectations for both households and companies,” Kiss comments.

Amundi’s base scenario now predicts a 0.8% decline for this year and 2.1% growth for 2024, which is lower than the current consensus. According to Kiss, the prospects for the external environment, especially for German industry, are still not improving, and the ability to draw on EU funds, which are vital for investments, keeps being postponed.

“The slow recovery, lower-than-expected inflation and the stable forint may lead the central bank towards a greater easing than expected; however, according to our expectations, there may be a serious chance of a change of pace only at the beginning of next year,” he noted.

Commenting on the data, ING’s chief economist Péter Virovácz says, “On the whole, despite the rather limited information available, our idea of the structure of the economy was confirmed. This means that, essentially, the sectors producing for export can drive the Hungarian economy,” he writes.

The volume of GDP decreased by 1.2% in the first nine months of 2023, Virovácz recalls, saying that although the fourth quarter could still improve the overall picture for 2023, it can already be stated that it will be a “lost year.”

Despite the recent favorable data, ING has not changed its growth outlook for this year. It expects a GDP decline of 0.5% for the full 12 months.

Inflation Milestone

Inflation reached a significant milestone in October, if only by a hair, when it dropped below 10%, commented Gábor Regős, head economist of the Makronóm Institute, on the latest data from the Central Statistical Office. On Nov. 10, KSH said that consumer prices were 9.9% higher on average in October 2023 than a year earlier and had decreased by 0.1% on average compared to September. Within that, motor fuels became 3.8% cheaper and food 0.1%.

Regős emphasized that the disinflationary processes are happening faster than previously expected: at the beginning of the year, many doubted that single-digit inflation could be achievable by December; getting there by October was not even certain in recent months.

Achieving single-digit inflation does not mean that the target has been reached; work still needs to be done to suppress monetary deterioration further, and from this point of view, the extent of the price increases in January will be the main issue, Regős warns. Looking at the year as a whole, inflation may amount to 17.7-17.8%, while it could drop below 7% by December, the Makronóm analyst says.

Based on the fresh data, the central bank can be expected to continue to loosen monetary conditions in November, noted Regős. According to him, the rate of easing could again be a strong 75 basis points cut.

This article was first published in the Budapest Business Journal print issue of November 17, 2023.

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