Macroeconomic and fiscal developments in the first half of 2022

While 2021 saw an improvement in global economic trends, which was also beneficial for the Hungarian economy, this year has seen a worsening of existing problems worldwide, exacerbated by the Russian attack on Ukraine and its spillover effects. In the first two quarters of this year, the Hungarian economy has been more successful than expected in terms of growth numbers, with seasonally-adjusted GDP volumes continuing to rise quarter on quarter, and volumes in the second quarter now 7% above their quarterly peak prior to the Covid crisis. However, the pattern of growth is rather specific: the primary driver in both quarters has been private consumption, which, after a record 11.5% in the first quarter, slowed only moderately to 9.4% in the second quarter. The first quarter’s stormy rise was triggered by a one-off factor, the income-boosting impact of a pre-election welfare spending package, and the rest of the year will be characterised by a declining pace of real income growth, with real incomes actually falling by the end of the year. As a result, GDP growth will be much lower than in the first half of the year, with stagnation more likely in the last quarter.
Moreover, the fiscal consolidation pressures following the high budget deficit in the first half of the year will not allow for a meaningful bail-out of companies and households hit by high energy prices. Continued interest rate hikes due to rapid inflation will make borrowing more expensive, which could hold back investment in particular, but could also have a negative impact on housing construction. The consumer price index was among the highest in the European Union in the first 8 months of the year, despite the impact of the increase in the real economy being accounted for only in the September price index. On an annual basis, consumer prices are expected to rise by between 14-15%, one of the highest in the EU.  Worse still, in 2023 the price index is expected to exceed the 2022 level, as the adverse price effects are only gradually being released into the market by the Hungarian government and are therefore being passed on to the base in a piecemeal fashion. The still stormy month-on-month increase in industrial, construction and agricultural producer prices is an indication of the high CPI.
Between January and August 2022, the forint depreciated by 12.5%, much more severely than other currencies in the region, as 10-year yields on government bonds are the highest in Hungary. The external and current account deficits are deteriorating rapidly, creating a worrying imbalance by autumn 2022.

A summary of the study is available in English here.
Prepared for the Secretariat of the Fiscal Council
September 2022
Project leader:
Éva Palócz
Zoltán Matheika, Gábor Oblath, Éva Palócz