Economy in focus: Hungary

As it grapples with recession and the highest inflation in the European Union, Hungary continues to struggle with economic challenges endogenous and exogenous alike. However, while GDP will again contract in 2023, the beginnings of recovery are expected later this year. 

Today home to 9.7 million people, Hungary remains a million people smaller than it was in 1980. As its economy collapsed in the mid-1980s and communism fell, Hungary lost many of its external markets in Central and Eastern Europe. Many of its factories closed, and by 1993, 800,000 Hungarians were unemployed—prompting many to emigrate. 

However, despite a rocky transition to a market economy, severe recession due to the 2008 financial crisis, and frequent clashes between the government of longtime prime minister Viktor Orbán’s Fidesz party and the European Union, Hungary’s economy has developed significantly. It’s capital Budapest is now a centre of commerce for CEE, and Hungary ranked fifth out of 23 countries in Emerging Europe’s 2023 IT Competitiveness Index, up from ninth in the region in 2022. In 2023, it ranked third in IT talent and fourth for IT infrastructure.  

Hungary currently has a BBB long term issuer default rating with a negative outlook from Fitch. Fitch notes that sharp fiscal spending before the April 2022 elections and “the cost of energy support measures resulted in the second-highest fiscal deficit among all EU-rated sovereigns in 2022” while its inflation “remains the highest in the EU as price caps have proved ineffective and added to fiscal costs, while monetary policy transmission is being hampered by targeted mortgage interest rate caps.” 

The highest inflation in the EU 

While high energy costs and other supply chain disruptions from the war in Ukraine have been felt throughout emerging Europe, Hungary outpaced its peers with year-on-year inflation of 25.2 per cent in March. Household energy prices increased by 43.1 per cent while those of staple food were even higher: 67 per cent for bread, 72.8 per cent for dairy products, and 74 per cent for eggs. 

The Vienna Institute of International Economic Studies’ (wiiw) senior research associate and author of its April forecast for Hungary, Dr Sándor Richter, tells Emerging Europe, “The reasons for the high inflation do coincide in part with the situation in other countries: the rocketing cost of imported energy and the impact of the war in Ukraine.” 

“However, there are more country-specific reasons as well,” Richter says. “The most important one: during – and even before – the Covid pandemic, right up until early 2022, the government pursued a loose monetary and fiscal policy designed to maintain a ‘high-pressure economy’; and the extraordinary public spending related to the 2022 elections served to top everything off.” 

Food inflation was also exacerbated by a remarkably bad harvest in 2022, when agricultural value added fell by 31 per cent. Despite an expected good harvest this season and improving external balances due to lower energy prices, Richter expects a 0.5 per cent decline in GDP in 2023. Consumption and investment remain low, and the fiscal situation remains dire. 

“The government is struggling to keep the fiscal deficit under control while the interests paid on the public debt are steeply on the rise,” says Richter. “The central bank has embarked cautiously on monetary easing: the caution is warranted, as the forint could weaken dangerously if the markets feel the interest-rate cuts are coming too soon or are too large.” 

Consequences for feuding with Brussels 

Despite these issues, the popularity of Orbán’s government remains steady as it redirects anger at inflation at the war in Ukraine and EU sanctions on Russia—banning the import of Ukrainian grain this spring. Brussels and Washington frequently criticise the illiberal government’s treatment of non-governmental organisations, democratic backsliding, insufficient judicial independence and rule-of-law, investigation of the numerous cases of suspected corruption, and heterodox foreign policy.  

The EU successfully leveraged access to its funds to secure Hungarian approval for an aid package to Ukraine in late 2022, but with Orbán uninterested in making reforms substantive enough to satisfy Brussels, the release of other suspended EU transfers appears likely to be further delayed.  

According to Richter, “The continued suspension of a considerable part of the EU transfers places the government’s fiscal targets in jeopardy, depresses aggregate demand and gets in the way of a more comfortable level of international currency reserves being attained.” 

If Hungary’s economic issues continue, it could continue to lose its best and brightest—who often leave in search of better opportunities abroad. 

“Emigration has become a major problem with the leaving of the most able young professionals, especially in occupations where the wages are relatively low even in domestic comparisons,” Richter says. 

But while Hungary’s economy will contract this year, there is hope. The economy is set to begin its recovery in the latter months, and wiiw forecasts that GDP growth will return in 2024, albeit at a modest 1.5 per cent.  

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