Brutal weakening of the forint on the horizon: Hungarian economy remains in decline

GKI Economic Research Co. forecasts a 19 percent inflation rate and a 0.5 percent contraction of the economy in 2023. The construction and retail sectors are expected to contract by 10 percent and 4 percent respectively. The average inflation rate of the euro will end up at around HUF 390. Interest rate cuts could dampen the forint’s momentum, making it difficult to achieve single-digit inflation by year-end.

GKI’s (GKI Gazdaságkutató Intézet) previous forecast in March differed from the consensus view. It projects a downturn, a slower decline in inflation, and potential delay in EU transfers. In June, GKI maintained its main economic forecast, expecting a 0.5 percent GDP contraction. Agriculture may contribute to preventing a larger decline, writes Pénzcentrum.

All-around decline

The recession of the economy continued in Hungary in Q1 2023, with GDP falling for the third consecutive quarter. Industrial production, construction and retail sales also experienced declines.

GKI revised its projections, no longer expecting industrial growth but rather a possible decline. The construction and retail trade contractions rose to 10 percent and 4 percent respectively. Housing completions are likely to be almost 20 percent lower than last year. Some service sectors may experience modest growth, while employment is to rise slightly with a marginal increase in the unemployment rate.

Consumption is forecasted to decline by 2.5 percent this year, with a 3.5 percent decrease in purchased consumption. Average gross earnings rose in April but resulted in a decline in real earnings due to price increases. Earnings growth for the year is likely around 16 percent, leading to a real earnings loss. Real earnings may begin to rise by the end of 2023.

Public investment was frozen and rescheduled, leading to a reduction in the number of infrastructure-related developments. The 2023 budget faced challenges due to overoptimistic growth forecasts and delayed EU transfers, resulting in a cash deficit exceeding the annual target. The debt servicing costs are a concern, and a deficit overrun of up to 1.5 percent of GDP could occur without corrective measures.

Reliance on the EU

The forint’s strength has been influenced by the high benchmark interest rate, but the rate cut cycle could reverse this trend. Uncertainty surrounding EU negotiations and Hungary’s economy policies may weaken the forint. Inflation will remain high, but a single-digit increase by year-end is possible.

EU transfers have been minimal, and GKI does not anticipate significant transfers this year.  The government went with a crisis management approach of austerity without reform, with tax increases, subsidy cuts and state intervention in market processes. The lack of strategic thinking and neglect of important sectors may lead to funding problems and a relatively high inflation rate.

GKI predicts limited EU transfers this year and emphasises the importance of reaching an agreement with the EU for confidence and funding.

Source: Pénzcentrum