Strong growth in Hungary’s private health sector, agriculture’s rebound from a low base and steady industrial exports helped the economy to avoid a deeper contraction in the first three months of the year as GDP fell 0.9% y/y (chart) and by 1.1% when adjustedfor workdays, the Central Statistics Office (KSH) confirmed in a second reading released on June 1.
On a quarterly basis, output fell for the third straight month as Hungarian households bracing for the EU’s highest inflation cut back spending, and spiralling borrowing costs and the postponement of state financed projects dampened investment activity.
The KSH revised the preliminary figure from -0.2% to -0.3% in the January-March period.
The y/y data was the fourth lowest among EU members, and the quarterly data was the second-worst.
The detailed data also revealed that among GDP components on the production side, industry contributed 0.9pp, the construction sector 0.3pp and the balance of taxes and subsidies on products 1.0pp to annualised headline decline, while the farm sector mitigated the drop by 0.5pp as output increased 20.2% y/y and the service sector rose by 0.7pp. Within services, healthcare and social services mitigated the decline by 0.8pp, due to the surge in demand for private healthcare providers.
On the expenditure side, final consumption contributed 2.1pp (-2.5% y/y) and gross capital formation 3.3pp (-8.1% y/y) to the headline decline. The trade balance reduced the slide in output by 4.4pp.
The outperformance of agriculture, accounting for 5-6% of GDP, is attributed to technical base effects rather than actual performance as in the first quarter data is drawn based on model estimates.
In view of the latest data, the government’s 1.5% GDP growth target looks increasingly bullish, said David Nemeth, an analyst at K&H Bank, a subsidiary of Belgian KBC. The cabinet’s projections could be met only under a best-case scenario, he added.
According to the European Commission’s latest forecast, real GDP growth is set to fall from 4.6% in 2022 to 0.5% in 2023 as higher prices, tighter financing conditions and fiscal consolidation have suppressed consumer spending and investment.
The government remains upbeat on second-half outlooks as energy prices have retreated, easing pressure on the external balance and the currency, and lower borrowing costs could revive lending which has fallen steeply as Hungary’s reference rate surged from 2.9% in early 2022 to reach 18%. The MNB cut the rate by 100bp at its last rate-setting meeting at the end of April.
Government-financed lending programmes, which could amount to HUF3 trillion (€8.1bn) in 2023, could help Hungary avoid a recession.
Subsidised loan schemes, the interest rate freeze and energy subsidies to companies alone could bolster GDP by 1.6pp. Without these, the economy would contract by 0.8%, Makronom Institute said, which put full-year growth at 0.8%.
The delay in the transfer of EU funds, rising borrowing costs and lower tax revenues are putting strains on Hungary’s public finances and risks are rising of a deficit overshoot.
Analyst note that the economy could bounce back from recession in the second half as inflation cools and new capacity expansions come on board.
On the production side, agriculture and services could be the main drivers, along with industry spurred by increasing investment. On the consumption side, net exports are slated to rise further as industrial exports remain robust, while lower energy demand will reduce imports.