What do El Niño, influenza and the car manufacturing industry have in common?
The three things mentioned in the title are all key factors that contributed positively to Hungary’s otherwise mixed macro performance in 2023. El Niño’s warm and wet weather has boosted agricultural output spectacularly, after a La Niña-related severe drought last year, saving the economy from a much deeper recession. In addition, it greatly helped reduce energy consumption, with a major positive effect on inflation, the BOP and the government budget. The return of influenza and similar seasonal diseases after a post-Covid break also boosted output in health care, through a higher number of GP visits and hospital treatments. And finally, the continued expansion of car manufacturing and battery production saved domestic industry from a severe fallback, and it greatly contributed to this year’s spectacular turnaround on the external trade account.
Anyway, the recession ended already in Q2, according to revised data, and material positive GDP growth was recorded in Q3. In year-on-year terms, industry, construction and retail sales were still decreasing, and so the recovery was based on agriculture, health care and the improving trade account.
Causing a positive surprise, CPI-inflation fell back to "single-digit" levels by October, thanks to friendly base effects, sharply decreasing producer and import prices, and to statistical methodology. This result essentially decided the size of MNB’s base rate cut for November at 75 bps, so that the rate still became increasingly real-positive. For December, the question appears to be if the Bank continues rate cuts of this size, or it slows further down to a 50 bps monthly reduction, depending on the conclusions of the Q4 inflation report.
Moving forward within the year, the balance of payments is becoming increasingly favorable. In Q3, from preliminary figures, the current account balance became a bit more positive, the errors and omissions gap did not increase further, and a surplus showed up on net FDI flows at last. As a result, the basic balance became moderately positive as well. However, in the first three quarters together, there was still an outflow recorded on the net FDI line, and the basic balance was also a significant deficit, just a little smaller than in the same period of 2022.
In recent weeks, the forint appreciated against the euro, overturning its weakening since start of rate cuts in late Q2. This had to do a lot with global trends, but also with the increasingly real-positive sterilization rate and most probably the strengthening of the BOP as well. Over the rest of 2023, the government may be interested in keeping forint strong, given its favorable impact on the end-year debt ratio. Regarding the latter, the fiscal deficit may not prove particularly helpful, as the government is likely to meet its upwardly revised target but will probably achieve nothing better than that. So, in reducing the debt ratio materially as planned, and thus impressing rating agencies, the valuation impact of a strong forint may be really helpful.
There has been no news about the government's having responded to the EU Commission’s new query regarding judicial reforms, and so, when the latter will present its recommendation on Hungary’s access to EU development funds remains unclear. A recently leaked controlling report from within the Commission on the state of public procurement in Hungary reportedly signals some positive change, but it is unclear to what extent this could reinforce the case for unfreezing the currently blocked grants and RRF loans.
A bigger problem is that the European Parliament, whose consent will be required, still appears to be against unfreezing EU funds for Hungary, with the majority of MEPs arguing that the government has not done enough to secure independence for local courts. In addition, the EP’s rapporteur on Hungarian rule-of-law matters has taken the position that the overall situation in Hungary is deteriorating continuously. In our view, a partial unfreezing of cohesion and RRF funds will be possible only as part of a political deal, partly in exchange for the government’s support of the currently planned big increase in the EU’s currently running seven-year budget.
Seven months before the elections for local governments and the European Parliament, Fidesz’s chances are improved by sharpening rivalry and hostilities among opposition parties. However, public concerns about the environmentally contentious electric battery factories and the increasing influx of foreign guest workers, in addition to the government’s failure to restore positive consumption growth so far may play to the opposition’s hands. Fidesz is still set to win, especially if the public perception of increased price stability and real wage growth becomes widespread by mid-2024.
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