Hungarian government intentionally unleashed inflation?

The government has apparently sacrificed the fight against inflation in exchange for economic growth. For the year as a whole, the economy has grown quite promisingly. The pre-election vote-getting campaign and the subsidised public loan schemes offered to businesses in the second half of the year could have contributed greatly to this.

Compared to the fourth quarter of 2021, the Hungarian economy was still able to show a minimal growth of 0.4 percent. Due to a strong start to the year, GDP as a whole grew by 4.6 percent compared to 2021.

According to data published by the Hungarian Central Statistical Office (KSH), Hungary was in a technical recession in the second half of 2022. The economy contracted by 0.4 percent in the last quarter compared to the previous quarter. In the third quarter, GDP contracted by 0.7 percent compared to the second quarter.

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Improved economic performance despite the complicating factors

“Hungary has improved its economic performance despite still not having access to the recovery funds it is entitled to,”

communicated the data Finance Minister Varga Mihály referring it to as a success, altough the statement is slightly misleading since the government has launched the Recovery Fund (RRF) programmes. “Despite the prolonged war and the sanctions imposed by Brussels, Hungary has managed to increase its economic performance and even ranks high”in in the EU growth rankings,” he added.

The Minister of Economic Development, Márton Nagy, did not fail to mention the war and the Brussels sanctions. The ministry’s statement said that the “outstanding” performance by EU standards was due to:

• targeted government measures,
• strong wage dynamics,
• years of sustained international confidence,
• high employment,
• sustained high levels of investment,
• and one of the lowest unemployment rates in the EU.

According to HVG, it is not clear what the Minister means by “international confidence”. The government’s targeted measures could have contributed heavily to economic growth in 2022, altough Márton Nagy does not mention the pre-election budget giveaway which contributed to the inflation.

Government measures are typically few or poorly implemented, random and market-distorting, such as price caps. The government’s unpredictable and in many ways damaging economic policies and the dispute with the EU contribute to the high interest rates that have stalled market lending, and in some segments have almost stopped it altogether.

Clear intentions

“The government’s intentions remain clear: to protect families, full employment, pensioners and cuts in rents in a way that will keep Hungary out of recession, with the aim of achieving at least 1.5 percent growth in 2023 and reducing inflation to single digits,” said Márton Nagy.

Economic operators have little room for further significant price increases affecting the citizens. External inflationary pressures, household consumption and real wages are declining and the forint exchange rate has stabilised. There is a good chance that inflation will fall to single digits by the end of the year, as it will be compared to the skyrocketing prices of last December.

It is clear that the government has already sacrificed fighting inflation in 2022 for the sake of economic growth. The same can be expected in 2023. In the revised 2023 budget, the government projected growth of 1.5 percent – a very optimistic forecast compared to other estimates.

Only one percent economic growth

Péter Virovácz, Chief Economist at ING does not expect growth to be more dynamic than 1 percent for the year as a whole.

“It can take 4-6 quarters to catch up,”

he commented on the GDP data for 2022. “We see a realistic chance that GDP will continue to decline on a quarterly basis in the first quarter of 2023, after which economic recovery and catching-up to pre-crisis GDP levels can begin.”

The economic outlook for 2023 is greatly enhanced by favourable external economic developments. These include the end of the energy crisis, the old-new growth-focused Chinese economic policy, and the resilience of the US and European economies.

For the last quarter of 2022, the KSH has only released preliminary data, showing that industry and services were the main contributors to the 0.4 percent annualised growth. KSH also pointed out that agriculture was a significant drag on the economy’s performance. In the future, the growth of value added in the service sector may also experience a more significant decline. According to the KSH, larger than usual revisions can be expected in the near future due to the deterioration in data quality and the resulting difficulties in methodology.

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Source: hvg.hu