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.

The automotive, technology, and food processing industries all fared well in the region. As was to be predicted, smaller ones have also subsequently adjusted to the growing prices and the decreasing aggregate demand.

Contributions of industry and market services have been particularly significant to the growth. The production of computers, electronic and optical items, and electrical equipment also saw a significant uptick, as did the manufacturing of transportation equipment. Transport and storage as well as professional, scientific, technological, and administrative operations were primary contributors to the rise in market services.

Predicting future output in the manufacturing sector may be quite difficult. A shift seems imminent, even if the Hungarian manufacturing PMI has been showing growth. The industry will feel the effects of falling aggregate demand and dwindling re-pricing power in the long run.

On the brighter side, orders for products of manufacturing are still 23% greater than they were a year ago. This gives businesses some breathing room before the inevitable slump.

Leveraging Emerging Sectors

The digital industry is one area of focus for Hungary as it seeks to expand its economy. In terms of broadband and mobile internet access, the nation outperforms its regional counterparts. This holds true for digital enterprises as well.

Recent studies suggest that throughout the pandemic, online shopping—which makes up roughly 80% of the digital economy—advanced at a rate equivalent to 2–5 years. Digital service adoption rates have almost doubled in that time. This cuts across several sectors including media and entertainment. Even gamers in Hungary now have access to some of America’s top ranked poker rooms as a result of the digital transformation.

The National Digitalization Strategy 2021–2030 establishes the strategic policy framework for the next decade and builds on the country’s existing digital policies. The plan is built on four pillars, each of which focuses on a different aspect of growth: the economy, innovation, education, and public administration.

These four pillars are:

• Digital economy
• Digital skills
• Digital infrastructure
• Digital state

This is probably associated with the introduction of a Digital Nomad Visa in the nation. Leveraging the growing pool of digitally-savvy individuals in the workforce is a fantastic approach to take advantage of this opportunity.

The Future

Hungary is generally expected to do better than its regional peers because of the government’s smart crisis management. This is despite the latest OECD study painting a dismal image of the immediate prospects of the European economy.

This does not mean the war has not had an impact or that inflation will not rise. However, it does give the country confidence in its ability to weather whatever may lie ahead.

While the Hungarian economy is by no means ideal, it has undoubtedly advanced much in recent years. A clear picture of the country’s development path over the next several years emerges from this analysis. While the road ahead isn’t without its share of hiccups, the government, businesses, and citizens are all well-prepared to deal with whatever comes their way.