Record-high Inflation Reshapes 2023 Budget

Analysis

Hungary is leading the inflation chart in Europe with 22.5% measured in November. Industry, which has been a driving force for economic growth, produced weaker-than-expected figures in October. Next year’s draft budget is expected to be amended in the coming days.

Consumer prices went up by 22.5% in November on a yearly basis, the latest data from the Central Statistical Office (KSH) shows. The highest price rises were measured for electricity, gas and other fuels, as well as food, over the last 12 months.

In one month, consumer prices overall increased by 1.8%. A price rise of 43.8% was recorded for food, within which the highest price increases were 102.9% for eggs, 81.8% for bread, and 79% for milk products. On a monthly basis, food products on average became 3.6% more expensive.

Inflation exceeded expectations in November, mainly due to the further acceleration in the rise in food prices. However, the price increase is still extremely broad, Gergely Suppan, head analyst at Magyar Bankholding comments. He adds that the rising price pressure was reflected in the fact that core inflation jumped sharply to 24%.

Due to the expected continuation of rising price in the coming months, inflation will continue to grow. It could reach close to 26% in December, but from the beginning of 2023, due to base effects, Magyar Bankholding expects inflation to decrease, gradually at first and then more sharply from the middle of the year, says Suppan.

The inflation of 22.5% is the highest in the European Union, with Hungary ahead of Latvia (21.7%), Estonia (21.4%) and Lithuania (21.4%). Among Hungary’s Visegréd Four peers and its nearer neighbors, inflation was measured at 16.4% in Poland, 15.5% in the Czech Republic, 15.1% in Slovakia, 14.8% in Bulgaria, 13.5% in Romania, and 12.7% in Croatia.

Industrial Data Disappoints

The inflation data was not the only figure to surprise analysts. In October, the volume of industrial production was 5.9% higher than a year earlier, but it decreased by 3.5% compared to September, the KSH announced. Such a substantial slowdown in industry surprised analysts, because this year this had been the sector that performed with the greatest stability.

The performance of the Hungarian economy had already decreased in the third quarter by 0.4% compared to Q2. Industrial production had increased by 9.6% in Q3, and thus offset the decline in other sectors. From this point of view, it is bad news that the industrial performance suddenly fell in October.

While the overall picture should not be a shock, since agriculture produced an insipid performance this year, the decline of industry as a whole is a serious negative surprise, points out Péter Virovácz, senior analyst at ING Bank. In addition, the extreme drop in energy consumption has probably already affected the output of the energy sector, since the country’s gas consumption in October was only two-thirds of the average of the previous four years, the analyst adds.

Despite the drop in October, analysts remain optimistic about industry’s longer-term outlook. Based on the detailed data of the previous month, the industrial order stock was 21% higher than a year earlier. If supply shocks do not affect the sector, then it could again be the engine of economic growth in 2023.

Budget Amendment by Decree

In the light of the latest macro data and the drastically changing economic environment, next year’s budget is expected to be amended in a few days. The Hungarian Parliament passed the 2023 draft in July; however, even at the moment of its adoption, it was clear that the figures would not stand the test of time, and sooner or later the government will be forced to amend it. A recent government decree makes it possible to do so by excluding the parliament and the substantive debate.

Due to the ongoing Russo-Ukrainian war, the international environment and economic conditions have changed to such an extent that the government would basically have to create an almost entirely new budget. But what will be the main numbers to amend?

For one, the 5.2% inflation rate the government calculated with in the first draft will surely be updated, most likely to more than 15%. The originally hoped-for 4.1% GDP growth will likely be downgraded to 1-1.5%.

Sticking to the original plans, expenditure cuts will likely continue, and the special taxes raised in 2022 remain. With this, a budget adjustment of around HUF 2 trillion would have been realized next year, according to the original plans. However, new adjustments to maintain the initial deficit target of 3.5%, both on the expenditure and revenue side, analysts say.

Numbers to Watch in the Coming Weeks

On January 3, the Q3 data on the balance of general government sector will be published by the Central Statistical Office (KSH). November labor market figures and retail trade data will be out on January 6, followed by the November industrial output from KSH on January 9.

This article was first published in the Budapest Business Journal print issue of December 16, 2022.

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