The Formidable Fight for Economic Stability in Hungary

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Hungary’s economy almost entered a technical recession as inflation rose across central Europe in the third quarter of 2022. The goal, as stated by Prime Minister Viktor Orban last Friday, is to prevent a slowdown in economic activity that might lead to a recession. In light of the mid-November revelations that the economy had contracted for the first quarter in over two years, this is hardly a shocking turn of events.

Unadjusted for inflation, early estimates indicate that Hungary’s GDP grew by 4% annually in the third quarter. Compared to the previous quarter, output declined by 0.4%, which is the first annual decline in quarterly output since the second quarter of 2020 hence the concern.

Despite the slowdown caused by the crisis in neighboring Ukraine, Orban has said that his nationalist government would continue to support families and seek to maintain employment levels high as part of its recovery efforts. In addition, the administration plans to unveil a revised 2023 budget proposal next month.

But, is that enough?

The Situation at a Glance

As was alluded to before, the energy crisis in Europe is increasing the likelihood of a recession, which in turn poses substantial threats to Hungary’s economic forecasts.

Case in point, there is strong evidence from both big data and short-term threats that the economy will enter a technical recession in the second half of the year. Energy markets are volatile and expensive, which puts stress on the country’s trade surplus and its ability to attract foreign investment.

The soaring cost of energy has contributed to a massive increase in Hungary’s trade deficit this year, which has weakened the forint and made the country more vulnerable. Natural gas and oil imports from Russia are crucial to Hungary’s economy.

The rising cost of energy imports prompted Orban’s administration to seek delayed payments from Russia’s Gazprom for gas supplies in late September. This, in turn, prompted the government to implement a spending freeze to allow for a thorough examination of current expenditures.

The Targets

The Hungarian minister of economic development has recently said that the government’s objective for 2023 is for the economy to increase by 1% due to steps made to boost investment and the extending of a cap on borrowing rates for small and medium-sized firms.

The Minister for Economic Development Marton Nagy said that the government would continue to enforce price restrictions on fuel and basic foodstuffs. Marton Nagy was speaking during a government briefing in mid-October. As long as these measures are required to keep inflation at bay, they would be maintained.

In an effort to reduce expenses for SMEs, Hungary will restrict interest rates on loans at 7.8% between November 15, 2022, and July 1, 2023. To encourage growth despite high inflation and high interest rates, the cabinet would also examine a change to a windfall tax on banks to increase lending.

Banking on Strong Performance from Industry

Output in manufacturing increased by 6.6% when compared to the previous year, year-over-year (after accounting for the impact of seasonality on production and working days). Since April, manufacturing has been on the upswing as companies become better equipped to handle challenges that arise in the supply chain.