Disinflation and the BOP are on track, but fiscal adjustment remains a problem
The current year is clearly devoted to macroeconomic adjustment, as the government is concentrating heavily on restoring price stability and putting the external and fiscal balances in order, following the serious damage caused by high energy prices and the election-year loosening of spending policies in 2022. Adjustment appears to be on track regarding disinflation and the balance of payments, but only limited success is likely in government finances. Our growth outlook for 2023 improved a bit from April, but the government’s optimistic GDP forecast still appears to be unrealistic.
The energy situation looks better than it did at any time over the last two years. The EU is running ahead of its plan for filling up its gas reserves for winter, and the European price of gas has fallen to its mid-2021 level lately. In addition, the maximum price set for Russian crude oil has appeared to be largely effective so far. All this is excellent news for Hungary’s trade account and government budget. On the negative side, progress on the diversification of energy imports has been very limited, and prospects in this regard do not look bright, either.
Unfortunately, our long-standing view that no new cohesion policy or RRF transfers from the EU are likely in 2023-2024 looks increasingly correct. Progress in the related talks between the government and the EU Commission seems just too slow to achieve a breakthrough before the European Parliament elections due in June 2024. This negative prospect does not imply a negative change in our forecast, but it definitely represents a serious limitation for the budget and BOP outlook over the next one-and-a-half years.
Our GDP forecast for 2023 has become more positive since April, mainly on account of the Q1 actuals, which were supported by the miraculous recovery of agriculture in the winter. Overall, GDP is likely to stagnate in the year as a whole, falling significantly short of the government’s forecast, on which the existing budget plan was based. However, growth is still likely to become materially positive in H2, as domestic demand is starting to recover on decreasing inflation.
Fiscal adjustment is set to remain an underperforming area for the whole of this year. The budget simply carried over too much trouble from 2022, on top of which the current weak economy is causing further problems. Thanks to tightening spending controls, a moderate reduction of the fiscal deficit is still taking place this year, but the targeted aggressive downsizing of the deficit is unlikely to be feasible.
The balance of payments is improving substantially this year, on the decreasing energy import bill, weak domestic demand and growing exports, especially of non-travel services. Unfortunately, the positive shift by the trade balance is partially offset by a growing deficit of investment income and the progressive drying-up of the inflow of EU development transfers. As a net result, though, Hungary’s external financing requirement is likely to fall to a moderate level, from the extraordinary high level seen in 2022.
Recent progress in disinflation has been quite positive, and so are prospects for the second half of 2023. The end-year level of CPI-inflation is likely to be firmly in the single-digit range, as suggested by current energy and food prices, massive base effects, the strong forint and weak domestic demand. An easing up of administrative limitations on some basic food prices from August will likely slow down the process a bit without seriously endangering its continuity.
Rapid disinflation will be most likely followed by systematic sterilization rate cuts, carried out progressively in each month between now and end-2023. Cumulative rate cuts will have to be smaller than cumulative disinflation for a positive real interest rate to be restored by year-end, as the MNB has promised with a view to further disinflation in 2024. But the exact pace of rate cuts will be probably determined by the EURHUF exchange rate. We expect significant forint depreciation by December, but substantially less than we did previously, due to the increasing strength of the BOP and the apparent official priority given to rapid disinflation over short-term output growth.
In 2024, growth will probably remain moderately positive, just as in H2 this year, limited by the continuation of fundamentally tight fiscal and monetary policies. We do not expect any major policy loosening in view of the upcoming local government and European Parliament elections; Fidesz’s election results may not be bright, but nothing close to a disaster for them appears to be on the cards. The government will also have to remain watchful of its credit rating, given the negative changes in this regard earlier this year. But despite continued policy tightness, we do not expect any rapid further disinflation, given low unemployment and the aim to achieve significant positive real wage growth next year.
Now read on...
Register to sample a report