Last Year’s GDP Growth Exceeds Expectations


The most rapid growth in Hungarian economic history: that is how Minister of Finance Mihály Varga characterized last year’s GDP data. Analysts were taken by surprise and quick to upgrade their forecasts for this year.

The Hungarian economy grew by 7.1% last year, making it the most significant annual growth in Hungarian history, Varga commented on the latest GDP data, released on Feb. 15. The minister insisted that the data shows that the economic policy based on tax cuts, supporting families and businesses and investments have proved effective, as they allowed for a quick recovery even after a crisis.

He also said that the Hungarian economy had performed outstandingly in 2021 compared to the EU. He said growth could be 5.9 % this year.

Hungary’s gross domestic product increased by 7.2% according to raw data and by 7.1% according to seasonally and calendar adjusted and reconciled data in the fourth quarter of 2021 compared to Q4 2020. Compared to Q3 2021, the economic performance rose by 2.1% according to seasonally and calendar adjusted and reconciled data. In 2021, the volume of GDP grew by 7.1% overall.

The data has exceeded analysts’ expectations, and they were quick to raise their growth projections for this year in the light of the fresh data.

ING Bank senior analyst Péter Virovácz said the growth was driven by the further recovery in consumption and, presumably, investment. The stronger-than-expected fourth-quarter performance also suggests that, due to the good yearend alone, economic growth can be expected to be roughly 0.8 of a percentage point higher this year compared to the market consensus so far.

It should not be ruled out that growth could approach or even exceed 6% in 2022, he thinks. The combination of surprisingly strong GDP data and the January inflation shock could encourage the national bank to raise interest rates for longer than previously expected. Eventually, the central bank base rate could peak at around 6%, Virovácz said.

Growth Sectors

Gergely Suppan, a senior analyst at Takarékbank, noted that growth occurred in all sectors except agriculture. Stagnating vehicle production, caused by a lack of microchips and other components, could have held back expansion by about one percentage point last year, he estimates. Consumption may have picked up, while investment may have continued to perform well, and the foreign trade balance has been a drag on growth to a smaller extent.

At the beginning of this year, a 20% increase in the minimum wage and the canceling of the personal income tax for employees under the age of 25 could give a significant boost to growth through consumption. In the second half of the year, the expected easing of raw material and chip shortages and a further recovery in tourism could keep growth high. Therefore, Suppan said Takarékbank had raised its growth projection for this year from the previous 6% to 6.3%.

According to K&H senior analyst Dávid Németh, growth in 2022 could be around 5%, given the current outlook. However, there are a number of downside risks as well, he warned. There are many questions, he said; for example, when will order be restored in international supply chains, and when will high energy and commodity prices and inflation normalize? It is also a risk, and especially for growth in 2023, that tightening will be needed in both fiscal and monetary policy, he added.

Gábor Regős, head of the macroeconomic department of Századvég Gazdaságkutató, highlighted that the weaker performance of the third quarter of last year had proved to be temporary. Preliminary GDP data confirms the expectation that economic growth this year could exceed 5%, he noted.

Consumption, driven by wages rising even higher than inflation, will play a major role in this. Investment is also expected to increase, with a growing emphasis on the private sector due to the postponements of some public investments.

In addition to rising inflation, the development of vehicle production poses a risk to this year’s growth: a prolongation of the chip shortage may slow down output, while a faster solution would help the economy expand, Regős said.

Tightening Cycle Continues

The decision of the Monetary Council of the Hungarian National Bank (MNB) on Tuesday was as expected; however, the release of the next inflation report could bring a change in central bank policy, according to analysts. The MNB’s policymakers raised the key interest rate to 3.4% from 2.9% on Feb. 22, while they also raised the interest rate on overnight deposits to 3.0% and the interest rate on overnight and one-week secured loans to 5.4%. Gergely Suppan of Takarékbank said that the MNB’s management had prepared to continue the interest rate hike cycle due to the substantial rise in inflation risks. The analyst pointed out that the base rate could rise to 5.5% by the middle of this year, gradually catching up with the one-week deposit rate, which is expected to reach 5.5% in May.

Numbers to Watch in the Coming Weeks

The Central Statistical Office (KSH) will release investment data for the fourth quarter of 2021 on March 1. The next day, the second estimate of Q4 and full-year GDP figures will be out. On March 3, January retail trade statistics will be published by KSH, followed by the first estimate of January industrial production data on March 4.

This article was first published in the Budapest Business Journal print issue of February 25, 2022.

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