Monitoring Hungary: The moment of truth approaches

In our latest update, we reassess our Hungarian economic and market forecasts. We think that over the coming weeks, it will become clear whether the risks to our base case scenario have materialised. We remain positive but cautious as we await the new data.

Hungary: at a glance

• The Hungarian government responded to the nine questions from the European Commission, and our sources indicate that the net 90-day review period has recommenced. There are just under 10 days remaining until the final decision.
• The technical recession probably ended in the third quarter of this year, and the next GDP figure will therefore bring a moment of truth. Nevertheless, a full-year recession cannot be avoided.
• Recent retail sales and industrial production data have disappointed, and the question remains whether we can expect a turnaround in the short term.
• Real wages will flip back to positive by September, but we doubt that the impact on consumption will be significant and we expect the labour market to remain tight.
• Energy price-related consequences of geopolitical risks will be a crucial factor in determining whether the current account will have a slight surplus by the year-end.
• Recent inflation dynamics have shown more promise than we or the market expected, giving the National Bank of Hungary (NBH) ammunition to argue for larger rate cuts.
• On the other hand, the biggest question remains whether the risk environment will allow the central bank to continue the rate-cutting cycle at the same pace.
• While the government revised the 2023 ESA-based deficit target to 5.2% of GDP, we need more evidence to assess whether the updated target can be met or not.
• The forint survived the first rate cut in the base rate without major damage. After some short-lived weakness and volatility, the forint should continue to strengthen.
• In the rates space, we can expect further steepening of the IRS curve again, while in bonds we need to see progress in the EU money story and a clearer fiscal policy picture for a significant rally.

Quarterly forecasts

Will the longest technical recession end in the third quarter?

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 in the second quarter was not enough to pull the economy out of a technical recession, as the collapse in domestic demand weighed on all sectors. This time around, we expect the technical recession to end in the third quarter on the back of the agricultural outperformance. Favourable weather conditions combined with a good harvest season support our view.

14 November will be the moment of truth – when the third quarter GDP data is due. Nonetheless, agriculture alone will prove insufficient in generating a positive balance in the entire economy this year. In our view, a 0.5% recession awaits us in 2023.

Real GDP (% YoY) and contributions (ppt)

Is the deterioration in export sales a turning point for industry?

Industrial production surprised on the downside in August, as production volumes declined by 2.4% month-on-month, contributing to a sharp fall in output of 6.1% year-on-year. At a sectoral level, the picture remains unchanged from recent months, with volumes expanding only in the electrical and transport equipment sub-sectors. However, in contrast to the dynamics of recent months, this time export sales deteriorated in line with domestic sales – which may explain the large drawdown in overall output.

We suspect that export sales may pick up as the dismal August figure was more the result of factory shutdowns, but subdued global demand limits the export outlook. Nevertheless, barring an ugly surprise in September, the expected industrial performance in the third quarter should be better than in the second quarter. This should help the economy to emerge from its technical recession.

Industrial production (IP) and Purchasing Manager Index (PMI)

Will the turnaround in real wages boost retail sales?

The retail sector is suffering from the cost of living crisis. The volume of sales in August fell by 7.1% YoY, while on a monthly basis, the overall volume declined by 0.5%. At the component level, food and fuel sales both contracted, while non-food retailing stagnated compared to last month. These dynamics are broadly in line with those seen in previous months, but the main question now is whether the turnaround in real wages will lead to a pick-up in consumption.

We suspect that the answer is no, as we believe that households will mainly deleverage and/or rebuild their savings before consumption picks up. In this regard, the 10-year low in households’ consumer confidence index supports our view. We therefore believe that the impact of the turnaround in real wages will not markedly boost consumption until 2024, leaving the rest of this year’s retail sales figures in the red.

Retail sales (RS) and consumer confidence