Hungary’s ‘hole’ too deep to avoid recession

Hungary’s economy will perform better in the second half of 2023—it could hardly do any worse—but not enough to avoid a full-year recession.

As athletes from across the world gather in Budapest for the World Athletics Championships, which begin in the city on August 19, Hungary is running a race of its own—to prevent its economy from contracting further. 

Talk of even modest growth, in the region of 1.5 per cent—the Hungarian government’s target for 2023—was ditched this week when the country’s Central Statistical Office, KSH, announced that the economy had shrunk 2.3 per cent year-on-year in the second quarter.  

It means that economic output has now contracted for four consecutive quarters, Hungary’s longest technical recession since at least 1995 when the current GDP calculation system was first introduced. 

‘The fundamentals are stable’

In a snap analysis of the figures, ING, a bank, suggested that services had taken a hit in the second quarter, “reality seems to have caught up with the sector”, it said, and that agriculture, which the government had hoped would drive better numbers, “did not live up to expectations”. 

“Before seeing the second quarter figure, our pre-publication forecast for full-year growth in 2023 was around 0.2–0.4 per cent, but we now see a significant chance that the Hungarian economy will not be able to grow in 2023,” the bank added.  

“This is even though the economy will most likely perform better in the second half of the year. However, the hole dug in the year’s first half looks too deep to climb out of quickly.” 

Hungary’s Finance Ministry attempted to place a positive spin on the data, claiming in a statement that, “the fundamentals of the economy are stable”.  

“Employment remains at record levels, the unemployment rate is one of the lowest in the European Union, the performance of agriculture and foreign trade is strong, and inflation is on a downward path,” the statement continued. 

According to Minister of Economic Development Márton Nagy, “the [Ukraine] war and sanctions have adversely affected the performance of the Hungarian economy, as they have caused a drop in consumption and a slowdown in investments. But the negative external economic environment, including the stagnation of the German economy, didn’t help either.” 

Nagy added that he expected “a rapid rebound” in the third and fourth quarters. 

Avoiding recession

No longer forecasting growth, the Hungarian government’s aim is now merely to avoid recession for the full year.  

“A very important and positive message, especially from a fiscal perspective, as it limits the risk of new stimulus measures in order to support the unattainable 1.5 per cent growth,” said ING. 

Nagy did reveal 14 policy points which he believes will help the government achieve its goal, although none will burden the budget additionally as all were already in place or had been previously announced. 

These include lowering inflation, which despite falling eight percentage points since the start of the year remained in July at an EU-high of 17.5 per cent. The government believes it can reduce inflation to single digits by year’s end. 

An interest rate freeze on residential mortgages will remain in place at least until the end of year, while small and medium-sized businesses (SMEs) will also continue to benefit from a cap on interest rates for commercial loans. 

The measures, Nagy believes, will add 1.5 per cent to GDP. It remains to be seen if that will be enough to prevent a full-year recession. 

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