Based on the annual rate of GDP growth – 4.6%, well above the EU average – 2022 was a relatively successful year for the Hungarian economy.
However, the quarterly growth rates showed a steady loss of momentum. The year-on-year growth was very fast in the first half of the year, due to the dynamic expansion of domestic demand, supported both by a spike in consumer demand (boosted by the stimulus package at the beginning of the year) and by buoyant business investment. From the second half of the year onwards, domestic demand started to weaken, as inflation, driven by a combination of government-induced consumer demand and the energy shock caused by the Russia-Ukraine war, began to erode real incomes and push up corporate costs. The central bank responded to the surge in inflation by resuming the cycle of interest rate hikes it had started earlier. Thus, by the end of the year, consumption growth slowed markedly, and investment growth also slowed down in the third quarter before turning negative in the last quarter, as a result of the suspension of public investment and the phasing out of infrastructure investment projects.
It should be noted that in 2022, due to the terms-of-trade deterioration, the loss of domestic income exceeded real GDP growth on an annual basis. Thus, despite the expansion in economic output, real gross domestic income (RGDI) declined by around 0.5%. The discrepancy between domestic consumption, which increased significantly (by 3.9% year-on-year), and the contraction in the country’s disposable income, was reflected in a significant deterioration in the external balance.
In 2022, the ESA deficit of the general government sector as a share of GDP fell to 6.2% from 7.1% in the previous year, a slight overshoot of the target. This improvement is relatively modest, but when taking into account the increase in interest expenditures and the additional costs of gas stock replenishment and utility price support, the implicit fiscal consolidation exceeded 3% of GDP in 2022. Due to the intensifying of savings efforts from the second half of the year, real primary expenditure declined slightly last year, despite the stimulus spending implemented at the beginning of the year. Investment expenditures fell the most.
The Hungarian price index was only the fourth highest among the EU countries in 2022, but by the end of the year, Hungarian inflation was by far the highest in the EU. In the case of food prices, a further increase in retail taxes, which retailers have to finance through price increases, contributed to the drastic price increases. The government’s constant intervention in retailers’ pricing has proved not only ineffective but counterproductive.