Hungary could be the black sheep of the region: according to the analyst, a declining economy, a weakening forint, and a disappearing deficit await us

By RockedBuzz 7 Min Read

Only the Hungarian economy will shrink

In 2023, Hungary’s GDP may fall by 0.5 percent compared to last year, meaning that even if the government wants to avoid negative economic performance, it will not succeed, according to the WIIW’s spring forecast published on Wednesday. Most recently, the company’s specialists expected another one percent drop in Hungarian GDP, that is, they slightly improved their estimate. The Vienna-based research institute expects growth in all of the countries examined, even the Russian GDP may stagnate, according to them, despite the war. In the immediate region, the Czech economy may expand by 0.2 percent, the Polish economy by one percent, the Slovak economy by 0.6 percent, and the Romanian economy by 3 percent this year.

Perhaps even worse news is that according to WIIW the Hungarian economy will not pick up in the coming years either, will grow by only 1.5 percent in 2024 and 1.7 percent in 2025. And this may be by far the weakest performance in Central and Eastern Europe.

According to the experts of the research institute, in 2023 both consumption and investments may decline in Hungary, only the contribution of foreign trade may be positive. Despite the annual GDP decline, the year may be characterized by duality, since after the recession in the first half of the year, moderate growth may come in the second half of the year.

Inflation may remain high this year, the annual average can be 18.5 percent according to the forecast, and then we can expect a price increase of 8 percent in 2024 and 5 percent in 2025. The analysts point out that, like other countries in the region, rising energy prices caused a significant rise in inflation, but there were Hungarian peculiarities, such as the weak performance of agriculture last year, the government’s budget spending before the 2022 elections, and the weakening of the forint.

WIIW is pessimistic

Based on its prognoses, the Vienna research institute has a noticeably more gloomy opinion of the Hungarian economy than the consensus. Market analysts typically give forecasts of around 0.5-1% for economic growth, and they see the budget deficit target as achievable for this year, and they think that only in the case of 2024, additional measures are needed to achieve the deficit target.

The analysis specifically addresses that the exceptionally high Hungarian food inflation can also have painful social consequences, since the proportion of food consumed by the poorest is higher. It is somewhat surprising that the ruling party did not lose its popularity even in this environment, which is partly due to the fact that the rhetoric blaming the war in Ukraine dominates the Hungarian public discourse regarding inflation, and the government blames the EU for the failure of the sanctions.

The fate of EU funds is uncertain

According to experts at WIIW the budget situation does not give much cause for joy either, this year instead of the 3.9 percent targeted by the government, the deficit in proportion to GDP may be 4.5 percent. From there, the deficit can be reduced to 4 percent in 2024 and 3.3 percent in 2025. It is emphasized that this year the budget started the year with a poor performance, in the first three months more than half of the deficit plan for the entire year was fulfilled.

They highlight that the interest expenses of the budget will rise sharply, from 2.3 percent in 2022 to 3.7 percent of GDP this year, and then to 4.6 percent in 2024. In addition, the budget will be burdened by the investment boom outlined by the government, which will require serious state subsidies. In this connection, they add that forcing battery factories into the Hungarian economy carries risks. These require serious natural resources and manpower, and these represent a risk even in the medium term.

The budget situation is also negatively affected by the uncertainty surrounding EU funds, WIIW points out that anti-EU propaganda is stronger than ever in the Hungarian media. According to analysts

the government is only “half-heartedly” trying to remedy the objectionable rule of law issues, and the cosmetics implemented so far are not enough for the European Commission, which learned from previous fiascos when it unsuccessfully tried to regulate the Orbán government.

According to the analysis, it is very unlikely that Brussels would give the green light for the payment of the funds in the first half of the year, and the prospects for the second half of the year are not encouraging either. And the permanent suspension of EU funds increases risks related to the budget, reduces demand and may necessitate larger central bank foreign exchange reserves. In addition, the credit rating agencies pay special attention to the developments, thus

even further downgrades are possible if the tension between the government and the Commission does not ease.

In the above environment, it is not so surprising that WIIW expects a massive weakening of the forint exchange rate, according to them, after last year’s 391.29, the average euro exchange rate could be 400 this year, and then this could rise to 415 in 2024 and 430 in 2025, so according to them within the foreseeable future, we will see a forint even weaker than last year’s low point.

Cover image: Getty Images

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