Hungary is among the exceptions in Europe, the economic prospects are getting darker and darker

RockedBuzz
By RockedBuzz 13 Min Read

At first glance, the CESEE region appears to be on an upward trajectory and could post a growth rate of 1.5% in the second quarter of 2023, surpassing the EU average, which has stagnated over the same period. However, behind the apparently positive statistics, a complex network of challenges and opportunities is unfolding, which is significantly influenced by the political decisions of individual countries, global economic changes, and the constantly changing geopolitical situation, he writes. in its autumn economic forecast, WiiW.

The report highlights significant country-to-country variation within the CEE region, indicating that overall growth masks nuanced differences. The economic performance of the majority of the EU countries in the region was mainly dragged down by the fact that their most important trade partner, Germany, is ailing. Among the regional states, the annual growth in the Czech Republic may be just 0.1 percent this year, while the authors of the report expect stagnation in Poland. Better GDP data for the whole of 2023 is expected from Croatia and Romania, where the expansion may be 2.5-2.5 percent, while in Slovenia they expect an increase of 1.3 percent and in Slovakia 0.8 percent.

In Hungary, however, a 0.5 percent contraction is predicted.

Of all the countries examined, only Estonia shows a worse overall picture with an expected annual decline of 1.3 percent. In addition, only one other country, Lithuania, is likely to experience a recession in the whole of 2023, where the WiiW economists predict a GDP decrease of 0.1 percent.

It is emphasized that the Western Balkan countries are performing better than the economies of the Central and Eastern European region. According to their data, they are in a more favorable position through tourism, remittances and direct foreign investments. According to WiiW, the economies of the CIS countries and Ukraine are proving to be more resilient than expected as they have adapted quickly to the changing economic situation.

Despite the war, this year’s GDP growth in Ukraine may be 3.6 percent.

Beneath the surface of the growth statistics, however, the report paints a grim picture of the living conditions of ordinary people: according to WiiW, more and more people in East Central Europe are struggling to pay for their basic needs. Real wages – one of the important indicators of economic well-being – are still significantly behind compared to the level of a year and a half ago. Poverty indicators are rising, which is in stark contrast to apparent economic growth, the institute’s economists write.

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Inflationary pressure: the persistent challenge in Hungary

Persistent inflation has a profound effect on household consumption, especially in Hungary – wiiw analysts write. They point out that inflation rates in Hungary have significantly exceeded the EU average for the past year or so, which has a serious impact on ordinary people. As explained, inflation has been gradually decreasing since the beginning of the year, in August the monthly inflation figure measured on an annual basis was only 14.2% (in September, the inflation rate slowed down to 12.2%).

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But they explain that there are two reasons for this: on the one hand, last year’s very high base is the reason for the run-off in the year-on-year data, and on the other hand, falling household consumption is also pulling down prices, as real wages fell by 8.1% in the first half of the year.

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One of the most worrying aspects of the inflationary wave was the rapid rise in food prices, which disproportionately affected low-income families, the analysis says.

Hungary’s recessionary problems

In the CESEE region, Hungary’s economic path is completely separated from that of the other countries, which is characterized by the wave of recession that has overtaken the country. GDP has declined for four consecutive quarters, which is a significant decline and unprecedented in the region. High inflationary pressures – reminiscent of hyperinflationary periods in history, according to WiiW analysts – have eaten up the windfall brought into the economy before last April’s elections.

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Hungary’s economic problems are further aggravated by the sharp drop in household consumption. Household consumption increased by more than 10% in the first half of 2022, which is in stark contrast to the 3.6% decline reported in the same period of 2023. The retail data paint an even more gloomy picture, showing a 10.3% drop, which indicates cautious consumer behavior.

WiiW also sees the significant decline in investments as problematic: as they write, EU transfers are still suspended by the European Commission, even though they represent a key source of financing for state investments, so public investments are left behind.

High interest rates have deterred the business sector from development, so both domestic and international investors are wary of capital injections.

The political conflict between the Hungarian government and the EU on “rule of law” issues further worsens the investment climate and creates an atmosphere of uncertainty. The EU dispute also keeps foreign capital away from the country.

The state of the export markets – Hungary’s primary sources of income – also do not bode well. WiiW’s economists point out that Hungarian exports barely experienced any growth, which further increases the economic difficulties. They point out that the first ray of hope is shining in a certain sector: the demand for electric vehicle batteries is strong.

But even this sector, which is supported by large foreign direct investment projects, has become one of the flagships of the Hungarian government’s reindustrialization efforts, and is threatened by a number of negative factors, according to analysts. Environmental concerns, inadequate water supply, labor shortages due to demographic changes and emigration, and the lack of public consultation on controversial issues cast a shadow over the viability of the project.

In addition, Hungary’s traditional trading partners – mainly Germany and other EU states – are being pushed into the background by emerging actors such as China and South Korea, which indicates a significant change in the economic environment. In addition, there are more and more disputes between the EU and China, which is another ominous omen.

Budget challenges and economic policy dilemmas

WiiW’s researchers point out that the country’s economic challenges are already reflected in Hungary’s budget situation, as a budget deficit larger than the planned 3.9 percent is already visible after the first 9 months. (The authors of the report do not elaborate on this, but last week the government already revised its deficit target for this year upwards to 5.2 percent, which according to several analysts still seems too optimistic – ed.)

According to WiiW, the runaway deficit causes uncertainty among market players about the stability of the budget. According to them, it is also not beneficial that the government decided on contradictory steps: while several investments were cancelled, the budget was burdened with significant expenses.

Moreover, it is questionable whether these expenses will have a positive effect on economic growth: a As an example of one-time high expenditure items, the authors mention the planned purchase of the Budapest airport, the price of which is unknown, but may reach several billion euros (based on market rumors, the bill may exceed 4 billion euros).

The ever-increasing interest burden on the public debt is putting additional pressure on the budget: analysts in Vienna estimate that this item is expected to reach 4% of GDP next year.

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WiiW’s analysis of the Hungarian GDP development. Source: Wiener Institut für Internationale Wirtschaftsvergleiche.

According to WiiW experts, it is therefore unlikely that a budget deficit of less than 3% of GDP will be achieved in 2024. They see

there is a real danger that the EU will launch an excessive deficit procedure against Hungary again.

The authors see that Hungarian economic policy has reached a crossroads: either the government curbs inflation or chooses to stimulate economic growth. Although the central bank has already initiated a certain reduction of the effective reference interest rate, the fragile forint/euro exchange rate makes it necessary to maintain relatively high interest rates. This scenario hinders the expansion of production and the increase of investments in the business sector – they write in the analysis.

Modest recovery and long-term challenges

Despite the challenges, WiiW’s analysis paints a cautiously optimistic picture of Hungary’s future. The report forecasts a slight return to growth in the second half of 2023. With the slight decline in inflation, the rate of decline in real incomes is expected to moderate – albeit slowly. However, they assess that households have been hit by a deep shock due to the economic downturn, as a result of which consumption habits will become much more frugal, and the population will be more careful with spending. The high interest rates have made loans unaffordably expensive, which further worsens the prospects of an upswing in consumption and thus a rapid economic recovery.

Net exports, which were the only positive component of GDP in the first half of 2023, are expected to contribute to growth in 2024 and 2025 as well. However, their impact is likely to decline, reflecting the changing economic environment.

In light of these, it is calculated that this year GDP will shrink slightly (0.5%), while in 2024 and 2025 a modest recovery is expected compared to the very low base (1.8% and 2.4%).

However, according to them, there are more downside risks, which could lead to worse growth in the next two years. The upswing in growth could be brought about by a strong recovery in EU transfers and the main export markets, but there is currently no sign of either.

“Tight fiscal and monetary policies, as well as reckless and chaotic decision-making at the highest levels, may result in slower-than-expected growth. Inflation will probably fall below 10% during 2023, and then slowly fall further in 2024 and 2025 and approach the EU average,” economists assessed the Hungarian situation.

Cover image source: Getty Images

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