Macroeconomic and fiscal developments in the first half of 2023

In most of 2022, domestic demand – boosted by government measures – drove economic growth, but industry and export also proved relatively resistant to the weakening of external demand until the end of the year.

But in the first two quarters of 2023, the contraction of domestic demand drove the Hungarian economy into a recession that was already reflected in the year-on-year growth rates as well. This was a result of skyrocketing inflation – driven by the stimulus package at the beginning of the year, among others – and the inflation-induced real wage decrease. The drastic fiscal spending cuts, along with the worsening financing conditions and the weakening willingness to invest within the business sectors, caused a drop in investments beyond expectations in the first half of this year. Only net export contributed positively to GDP growth. On an annual basis, GDP decreased by 1.7% in the first half on average and by 2.4% in the second quarter alone. This makes Hungary a negative outlier among the other countries of the region.

During the rest of the year, disinflation will have a positive impact on real incomes but the effect of income growth on private consumption will probably be delayed. The Kopint-Tárki, maintaining its previous forecast, expects GDP to decline by 0.5% in 2023. Private consumption is likely to decrease by 1.5% while fixed capital investments may drop by 7.5%, amid moderately increasing export and slightly decreasing import.

The cash-flow deficit of the central subsystem reached HUF 2,940 billion and amounted to as much as 86.5% of the annual deficit target. The ballooning deficit is partially a result of one-off or seasonal effects, including the asymmetry between the timing of the outflow of utility price support expenditures and the inflow of the extra-profit tax revenues. The Kopint-Tárki expects the yearly deficit-to-GDP ratio to reach 4.9% of GDP in 2023, but in the absence of adequate intervention, the deficit may even exceed 5% of GDP.

In the last year and a half, the runaway inflation and the rise of inflation rates to highs far above the levels seen in other EU countries was the most dramatic macroeconomic development in Hungary. The average harmonized inflation (HICP) rate of about 24% in the first half of 2023 was almost thrice the EU average (8.3%). The Kopint-Tárki predicts an average inflation rate of 18% for 2023: after the 23.6% in the first half, the price index may ease to 12.5% in the second half. The primary cause of the moderation is the statistical base effect since inflation was getting close to its peak toward the end of 2022. The subdued demand may continue to be reflected in the price indexes but less prominently than in the first half of 2023.

The Secretariat of the Hungarian Fiscal Council, contract no. KVT/7-1/2023
September 2023
Project leader:
Éva Palócz
Rozália Bogó, Iván Csaba, Zoltán Matheika, Katalin Nagy, Gábor Oblath, Péter Vakhal