Hungary

Hungary is a modest performer among emerging economies and its high dependence on exports, in particular on automotive shipments, causes above-average cyclical fluctuations in growth. Real GDP expanded by an average +2.4% over the past 20 years though the performance was better over the last five years prior to the Covid-19 pandemic (+4% on average, on par with the average of the Central and Eastern European EU member states and above the whole Emerging Europe average). While the global Covid-19 crisis affected the Hungarian economy markedly in 2020 (-4.5% contraction), it rebounded strongly with a +7.1% output increase in 2021. However, Hungary’s economic prospects have considerably worsened since war broke out in Ukraine. This is mainly due to the country’s heavy (pre-war) energy-import dependence on Russia and the impact of EU sanctions against Russia on the domestic economy (for example rising inflation and a potential energy crisis). In 2022, economic activity in Hungary still held up better than initially expected, thanks to robust consumer spending, investment and external demand. Statistical base effects also helped to achieve growth of around +5% annually. However, the impact of surging inflation, rising interest rates, weakening external demand and deteriorating business confidence will take full effect in 2023. We expect both domestic and external demand to slow down markedly. A recession is likely in the first half of 2023 and for the full year real GDP is likely to grow at less than +1%. The tentative forecast for 2024 is a modest recovery to just around +2% growth.

Inflationary risks have increased against the backdrop of rising global energy and food prices and comparatively loose monetary policies in Hungary. Monetary policy by the Magyar Nemzeti Bank (MNB, the central bank) is officially based on inflation targeting (3% ± 1pp) but has been loose for a long time. The real interest rate has been negative since end-2016, i.e. the  key policy interest rate has been below the inflation rate, even as the latter has been above the target range since early 2021 amid rising energy prices. The latter, combined with a weakening forint (HUF, the local currency) that pushes up import costs, drove consumer price inflation into double digits for most of 2022 (25% at year-end) and we expect this to remain the case until at least mid-2023. The MNB began monetary tightening earlier than peers in the region (in June 2021) and eventually also more decisively in H2 2022 – it hiked its policy rate from 0.60% in May 2021 to 13.00% at end-2022. But this did not prevent headline inflation from surging to the highest rate in the CEE region in 2022. Meanwhile, the HUF depreciated by -8% against the EUR in the course of 2022, more than any other CEE currency. We expect it to weaken further in 2023 against the backdrop of a large current account deficit and low foreign exchange (FX) reserves.

The Hungarian business environment is just above average. Increased state interference in the economy through frequent and arbitrary policy changes (for example sectoral taxes, pension nationalization, mortgage pre-payment schemes, utility tariff cuts and the weakening of institutions (diminished roles of the Fiscal Council and the Constitutional Court) have hurt the investment climate in recent years. This is also reflected in the World Bank’s annual “Worldwide Governance Indicators” surveys, according to which Hungary has steadily deteriorated with regard to regulatory quality, rule of law and perceptions of corruption over the past decade. In our proprietary “Environmental Sustainability Index”, Hungary is ranked 93rd out of 210 economies, reflecting poor scores for renewable energy, water stress and recycling rate.