Hungary remains in recession as economy contracts 0.2 q/q in Q1

Hungary remains in recession as economy contracts 0.2 q/q in Q1
/ bne IntelliNews
By Tamas Csonka in Budapest May 16, 2023

Hungary’s economy contracted for the third straight quarter in January-March, falling 0.2% compared to the last quarter, according to preliminary figures from the Central Statistics Office (KSH) on May 16. Analysts were expecting a steeper, 0.6% decline.

On annual terms, output fell 0.9% y/y (chart) and by 1.1%, when adjusted to calendar effects, which was in line with estimates.

In EU comparison, Hungary’s Q1 GDP was the fourth-weakest on a quarterly basis, and the second-worst on an annual basis.

In a short commentary, KSH said the weaker performance of the industry contributed to the fall in great extent, while agriculture and services moderated the decline. Performance of the healthcare sector approached pre-pandemic levels and was the driver of growth in services. KSH will provide detailed data on June 1.

Despite high investment rates and substantial government subsidies, industrial output dragged down growth, while higher agriculture output was expected after last year's disastrous yields, commented Makronom analyst Gabor Regos said.

The positive surprise came from the service sector, possibly as a result of growth in private health care, he added. Consumption has been held back by deteriorating real wages, but inflation eases the purchasing power of households is set to rise and lift retail sales, MBH Bank analyst Gergely Suppan noted. Analysts expect that Hungary’s economy bottomed out in the first quarter and is bracing for a rebound in the second half as inflation is tamed.



Most Hungarian analysts believe that GDP will grow 0.5-1% this year, which is below the government’s 1.5% target. ING Bank is less bullish with a 0.2% projection. Analyst Peter Virovacz said there is a 50-50 chance of the Hungarian economy emerging from the technical recession before the third quarter.

The government will not make substantial fiscal sacrifices to maintain the initial growth target this year as the excessive deficit procedure (EDP) will be intensified starting next year, leaving no room for budgetary slippage, he added.

Our current forecast for 2023 suggests a modest annual growth rate of 0.2%, followed by approximately 3% GDP expansion next year. 

The statement by the Economic Development Ministry also stressed that the economy has hit its low in the first quarter, and it affirmed the government's 1.5% GDP target for the year. Subsidised corporate credit programmes could contribute 1-1.2pp to headline growth in 2023. Calculating with the effect of government-mandated interest rate freezes for households and SMEs, the combined impact of all government measures could contribute 2pp to GDP, it added.

The expansion of vehicle and battery production, the farm sector, the healthcare industry and services gave impetus to GDP already in the January-March period, the finance ministry said and referred to the latest forecasts by the European Commission and the IMF that show Hungary avoiding a recession in 2023.

On Tuesday, EBRD revised its 2023 forecast from a 0.2% decline to a 0.4% growth in an update of the Regional Economic Prospects released in February. The bank household purchasing power will decline this year amid high inflation and government consumption shrinks due to budgetary restraint, but FDI inflows and private investment are expected to support GDP growth.

EU funds, especially those from the RRF, will likely reach Hungary only in late 2023 or 2024, it added. The EBRD sees Hungary's GDP growth picking up to 3.5% in 2024 as external demand improves and real incomes recover.