Monitoring Hungary: Full-year growth outlook downgraded

In our latest update, we reassess our Hungarian economic and market forecasts, as we turn gloomier on the full-year growth prospects. The marked collapse in domestic demand supports both external balances and disinflation. We also add some more hawkishness to our monetary policy call.

Hungary: at a glance

• Following weaker-than-expected activity data in the second quarter, we now see a recession in 2023 as we lower our full-year GDP growth forecast to -0.5%.
• The collapse in domestic demand is reflected in industry and retail sales data, while the value added share of both sectors remained weak in the second quarter.
• Real wage growth has been negative for 10 months, and even after a turnaround, we expect only a limited impact on consumption in the fourth quarter.
• The slowdown in economic activity is drastically reducing import demand, and we now expect both the trade and current account balances to end the year in surplus.
• Disinflation will continue amid constrained repricing power, with the headline and core measures falling below 8% and 10%, respectively by the end of the year. 
• After the September rates conversion, monetary authorities will likely switch off the autopilot mode and move to a second phase of policy normalisation, so we make a slight hawkish change to our interest rate forecast.
• We see a 2% of GDP slippage in this year's budget, which is likely to be addressed by a combination of consolidation and an upward shift of the target after the expected September revision.
• We remain positive on the forint, as the relative carry opportunity has improved in light of the latest guidance from the central bank.
• In the rates space, a possible upside surprise to inflation might be convincing enough for investors to adhere to the hawkish tone of the central bank, shifting short-end rates higher.

Quarterly forecasts

irst-half data prompts downgrade to our 2023 growth outlook

Hungary has been in a technical recession for a year now, with economic activity contracting in all sectors except agriculture in the first half of 2023. The positive contribution from agriculture was not enough to pull the economy out of technical recession, as the collapse in domestic demand weighed on all sectors.

Going forward, although real wages are likely to rise from September, this should have a limited impact on consumption. With double-digit interest rates for the rest of the year and with scarce fiscal room, investment activity will be severely constrained. On the export side, a looming global manufacturing recession is likely to weaken export prospects.

Taking these factors into account, we have decided to revise our full-year growth forecast from 0.2% to -0.5% year-on-year, thus we now see a recession in 2023.

Real GDP (% YoY) and contributions (ppt)