Moderate recovery and sticky inflation
Our new quarterly forecast for 2024-2025 uses the average energy import prices of 2023, and it treats the possible escalation of the existing sharp conflicts in the Middle East, and a substantial upturn in energy prices and sea transportation costs as a result, as a major risk factor for 2024-2025. We see a considerable probability of significantly negative developments in this regard, yet we took this simple approach to avoid arbitrary assumptions and to keep the meaning of our results as clear as possible.
Following moderately negative real GDP growth in 2023, the economy will likely recover only at a moderate speed in 2024, most certainly more slowly than hoped for by the authorities. The reasons for this are the weakness of the external markets of domestic industry, the slow recovery of consumer demand from last year’s slump, and the normalization of agricultural production after the massive rebound from the previous year’s weather-related catastrophe in 2023. But eventually, household consumption is likely to break into significantly positive growth, propelled by higher wages, and fixed investment should be supported by the recently released EU funds and by new greenfield FDI projects.
The pace of disinflation, measured by the year-on-year headline rate, has been really impressive in recent months. CPI-inflation ended 2023 lower than expected, price stabilization having been helped by the overlapping impact of the weak economy, sharply falling energy prices, good agricultural results and the appreciating forint. However, the supporting impact of these factors is gradually fading away, and there will be very little to offset the expansionary effect of this year’s income policy measures from Q2 onward. Even though the headline inflation rate will likely approach the MNB’s medium-term target range initially, it will probably get back in H2 to roughly where it started 2024.
The balance of payments went through a major improvement in 2023 because of a spectacular turnaround in the trade account. But in 2024, that improvement will likely be partially reversed as domestic demand and imports are starting to increase again. Improved prospects for EU funds will help, but improvements in the investment income deficit and FDI flows will also be needed. Overall, a small but moderately increasing basic deficit looks likely in 2024-2025.
Fiscal policy was quite restrictive in 2023, especially if one is looking at the real economic content. The fact that government budget revenues heavily rely on VAT and other indirect taxes proved to be a major problem, whereas the government saved quite a lot on the lower-than-expected need to subsidize retail energy prices. Yet, fixed investment spending had to be cut back sharply. In 2024, tax revenue will likely look much better, and the partial release of new EU funds will help as well. The fiscal deficit will be most probably reduced further, but only to a moderate extent, significantly falling short of the requirements of this year’s ambitious deficit target. The official plan to reduce the government debt ratio did not materialize last year, and only very small reductions are likely in 2024-2025. We expect a limited and temporary policy loosening in H1 2024, to improve Fidesz’s chances in the upcoming local and EP elections.
The MNB has maintained its tight policy stance recently, systematically reducing its sterilization rate but allowing the ex-post real interest rate to become increasingly positive. Meanwhile, the Bank was progressively withdrawing refinancing credit, to halt the growth of its balance sheet. In H1 2024, further base rate cuts are likely, possibly at a somewhat accelerated pace initially, in response to faster-than-expected recent disinflation. But in H2, rate cuts are likely to come to a halt if disinflation actually stops, as we expect. As long as real interest rates remain positive, the MNB is likely to refrain from raising the base rate even if inflation rises a bit in late 2024. The Economy Ministry and the MNB will probably continue quarreling, but the MNB is likely to stick to its tight policy line until March 2025, when Governor Matolcsy’s term will expire. The risk of a more government-friendly governor from that point onward is significant.
Prospects for the relations of Hungary with the EU remain unclear. We expect the newly released EU funds to remain available and paid out in an orderly fashion, but we see little probability for the release of the rest of Hungary’s cohesion policy and RRF quota. The coexistence of PM Orbán and the EU’s mainstream will remain difficult. Mr. Orbán may be persuaded to unblock EU aid to Ukraine in February, but the price of his approval and whether this will lead to a normalization of relations is not known yet. Fidesz may be admitted into the ECR faction of the European Parliament this spring, but in this case his pro-Russian bias and opposition to the EU’s recent migration deal may prove to be a problem. In the June EP election, the ECR and other radical right-wingers are expected to make gains, but the big breakthrough hoped for by Mr. Orbán does not seem to be on the cards. Similarly, whether his high hopes attached to a Trump reelection in the US will be duly rewarded remains fundamentally unclear.
In domestic politics, the key event of 2024 may be the June 9 election for local governments and the European Parliament. Fidesz is expected to win with relative ease in both votes, as its opposition is weak, its media dominance is intact, and it scored important points on disinflation and income policies lately. For sure, there are Fidesz-negative factors as well, including the disastrous performance of public health services, the increasing influx of foreign guest workers and the possibly negative domestic reception of the government’s lack of success in EU relations.
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