Hungarian Bankholding: 5.9 percent Hungarian GDP growth expected
The Hungarian economy can cope with the challenging international environment
GDP growth of 5.9 percent is expected this year, according to analysts of Hungarian Bankholding said at the press event of the banking group. According to Gergely Suppan, head of macroeconomic analysis, investments at the national economy level may continue at a dynamic pace and wages may also rise significantly this year, although the Hungarian economy will have to cope with a difficult external environment due to the effects of the Russian-Ukrainian war.
Macroeconomic analysts had expected an improvement in the growth outlook, based on the effects of the stronger-than-expected economic recovery at the end of last year and the first two months of this year. However, the outbreak of the war in Ukraine and the changed international economic environment could have an overall negative impact on domestic growth prospects through a number of mainly indirect effects.
Gergely Suppan, Head of Macroeconomic Analysis at Hungarian Bankholding, forecast GDP growth of 5.9% in 2022 and 4.2% in 2023. According to the analyst, the indirect effects are most likely to come through disruptions in supply chains, closely linked to spillover price pressures from international levels, while inflation, which is at a decade high, could reduce real household income in Europe, reducing external demand.
Labour market recovering
This year, wage dynamics are expected to increase significantly, with an average gross wage growth of 14.9%. This is mainly due to a nearly 20% increase in the minimum wage and guaranteed minimum wage, substantial wage increases in several public sectors and the payment of the six-month service premium for army and law enforcement personnel. The labour market tightened again last year, and the trend is set to intensify in 2022. As a result, Hungarian Bankholding analysts expect growing wage dynamics for those earning above the minimum wage.
"We expect that as the number of people in employment rises, the unemployment rate should
also show a steady decline, to 3.3% this year. In addition to favourable labour market conditions, government support, including the personal income tax rebate for families could also lay the foundations for consumption growth," said Gergely Suppan.
Investment growing at dynamic pace
At the national economy level, investment is expected to continue at a more subdued but still dynamic pace in 2022, with an expansion of 4.3%, following a 3.8% growth in 2021.
Among other measures, the government has successfully countered the negative economic impact of the coronavirus pandemic by providing large direct aid to business investment, low-interest loans from the central and state-owned banks, and guarantee schemes, the effects of which have been felt strongly since last year. At the same time, external conditions such as rising interest rates, increasing uncertainty and risks due to geopolitical tensions, steadily rising energy prices and investment costs are pushing investments into postponement.
Analysts at Hungarian Bankholding pointed out that at current energy prices, energy efficient investments can pay off even at higher interest rates, and the negative impact of rising interest rates can be offset by the preferential loan schemes and GINOP tenders that will continue to be available for SMEs. Residential investment will be boosted by the reintroduction of the 5 percent VAT rebate for new housing, as well as by a number of family support schemes, administrative and other cost-cutting programmes and housing renovation subsidies. However, rising interest rates and a steep rise in construction costs could hold back residential investment in the medium term.
War in Ukraine overhauled external trade prospects
The war between Russia and Ukraine, as well as the international economic situation, have substantially overhauled the outlook for external trade. A sharp rise in world prices for energy and other raw materials is causing a steep deterioration in trade ratios, which can only be offset to a limited extent by a surge in grain prices.
"With investment and consumption picking up, we expect the external trade surplus to decline in the first half of this year, but the supply problems, the gradual easing of the chip shortage and the commissioning of new production capacity may lead to a rebound in the external trade balance in the second half of the year," added Gergely Suppan.
Maintaining price restrictions could prevent major shock
The rebound after the COVID waves and the war between Russia and Ukraine will also substantially override the inflation outlook, which had been already high. Since the outbreak of the war, gas, electricity, and oil prices have risen sharply, which has already caused serious difficulties for market players. In addition, the conflict could have a serious impact on the rise in food and other commodity prices, also due to shortages of raw materials.
Analysts expect inflation to rise further in the coming months due to repricing, with a figure of 8.2% expected for this year. At the same time, maintaining price restrictions could prevent a significant price shock. The inflationary pressure could ease from the second half of the year, with the average inflation easing to 4.2% next year.
Following the outbreak of the war in Ukraine, the Forint weakened against the Euro to the 400 level, with high volatility, and then stabilised between 370-375 after a positive correction. According to the analysts of Hungarian Bankholding, the exchange rate could be pushed out of this range by the rule of law procedure launched by the European Commission and developments in the war: a weakening in the event of an escalation of the war and a strengthening in the event of a ceasefire or peace agreement.