By the autumn of 2023, the Hungarian economy had passed the most difficult stage of the crisis that arose due to the domestic economic consequences of the government’s giveaways before the 2022 parliamentary elections and the global economic consequences of the Russian aggression against Ukraine.
The external balance (the current account), which showed a dramatic deficit in 2022, turned positive in the second quarter of 2023, the recession ended in the third quarter, inflation became single-digit in October and access to EU transfers was within reach, albeit only very partially. At the same time, the general government deficit is much higher than planned; inflation was still the highest in the EU in October and it will be exceptionally high on an annual average. The expected economic downturn in Hungary this year is likely to be the second deepest (after Estonia). Economic growth is expected to be modest in 2024, faster than the EU average (1.3%) but only weak-medium (2-2.5%) in the region. The decline in inflation is likely to be severely curbed, while Hungary could be subject to an excessive deficit procedure for a general government deficit above 3%.
GKI essentially confirms its September forecast for 2023-2024. It expects GDP to decrease by 0.5% in 2023 and to grow by 2-2.5% in 2024. This forecast for 2023 was very pessimistic at the beginning of the year, but is now more optimistic. The fact that the Hungarian economy is expected to contract by only around 0.5% in 2023 is due to an expansion of agricultural GDP by around 60%. If agricultural GDP had only reached the 2021 level, the Hungarian economy would have contracted by around 2%. GKI did not change the forecasts for household consumption of -1.5% (but within this the final consumption is -3.5%), or +2% in 2024, and -10% and -2% for fixed capital formation also remained unchanged. (There may be a slightly greater decline in investments this year.)
In the case of inflation, GKI slightly decreased its projections from 18% to 17.7% in 2023 and from 7% to 6.5% in 2024. For 2024, this is only slightly higher than the government’s forecast of 6%, but the main difference is in the extent of change. According to GKI, the decline in inflation between 2023 and the end of 2024 will be very modest. The MNB has been following a very cautious interest rate policy for a year. Since the unification of the benchmark and base interest rates, in October and November 2023, only 0.75 percentage point reductions were made, which were smaller than the fall in inflation, so a period of positive real interest rates began. However, according to GKI, due to the expected good inflation data, the interest rate may be cut again by 1 percentage point (to 10.5%) in December. In 2024, however, the interest rate cuts may slow down in parallel with the slowing down of inflation, and by the end of the year, at best, a base interest rate of 7% can be expected. In 2023, after several years of weakening, the forint strengthened by an average of 2.5% annually, and based on a comparison of year-end data, it is expected to remain roughly stagnant. After the HUF382 euro in 2023, if the strict monetary policy is maintained and the international political-economic environment remains substantially unchanged, including the possibility of at least partial additional access to EU transfers, only a minimal weakening is likely in 2024, with an annual average of HUF385 expected, with significant fluctuations.
However, the general government deficit in 2023 will certainly be higher than previously expected by GKI, possibly even higher than the 5.2% forecast raised by the government in November (5.7%). For 2024, however, the GKI does not change its forecast of 3.9%, which is already higher than the government’s (2.9%), due to the lack of information—the government has declared that it will not yet address the revision of the 2024 budget, which has become completely unrealistic due to the changes this year—noting that a substantial adjustment would be needed to achieve this.
The external equilibria in 2023 is expected to be more favourable than previously projected. The current account surplus could reach EUR1.3bn, after a deficit of EUR13.6bn last year. The current and capital account surplus may reach EUR4.3bn (over 2% of GDP), with inflows essentially left over from the previous European budget cycle. In 2024, the improvement in the current account will slow down, mainly due to the base effect and a more subdued increase in the foreign trade surplus. GKI expects a surplus of EUR2bn (almost 1% of GDP). So far, only EUR1.4bn of EU capital transfers seem certain to arrive, but GKI, with much uncertainty, sees the possibility of agreeing on a somewhat larger amount, roughly equivalent to EUR3bn in 2023. This is significantly less than the amount that would be available in the event of a return to the rule of law.
Economic policies based on short-term and power strengthening considerations, and prone to unjustified stimulus, are unlikely to change. However, this will not ensure sustainable growth based on a lasting reduction in inflation and the creation of equilibrium, nor will it strengthen competitive market relations or normalize relations with the EU.Download full analysis