Hungarian Bankholding expects inflation of 11.7% this year and 7.6% next year
Inflation may rise to 11.7 percent in the upcoming months and may fall to 7.6 percent next year due to repricing, the weakening forint, tax increases and higher-than-average consumer energy bills, according to a second quarter macroeconomic analysis by macroeconomic analysts of Hungarian Bankholding. Gergely Suppan predicts GDP growth of 5.7 percent this year and 2.7 percent in 2023 due to the protracted war, the deteriorating external environment, rising interest rates, the partial removal of preferential household energy prices and severe drought damage this year.
"The outbreak of the war in Ukraine is worsening the domestic growth prospects through a number of largely indirect effects. These are most likely to be felt through disruptions in supply chains and closely related to this, through price pressures from abroad. There is considerable uncertainty about the duration and outcome of the war, the further escalation or, in a favourable scenario, the easing of sanctions, remain unknown. The impact of these on production chains, energy, raw material, and food supplies is unpredictable," said Gergely Suppan, Head of Macroeconomic Analysis at Hungarian Bankholding.
The expected slowdown in the global economy, with some leading economies facing the prospect of a deepening recession, rising inflation and increased monetary tightening to counteract it, is casting a shadow over the growth outlook. Growth is also being negatively affected by the partial removal of preferential household energy prices and is being held back somewhat by falling agricultural production due to the extremely severe drought. However, the domestic outlook is favourable by international standards, with double-digit wage growth and household transfers expected this year outpacing significantly higher-than-expected inflation. The latter is being held back by domestic price constraints, so real incomes could rise again this year, contributing to consumption growth. Against this backdrop, experts of Hungarian Bankholding do not expect a recession in the base case, but quarter-on-quarter growth in the second half of the year could come close to stagnation. Nevertheless, the possible cut-off of Russian gas supplies to European countries poses a substantial risk to growth, as it could force a number of sectors to shut down, which would also sharply reduce domestic production.
Inflation may rise further
"Inflation could continue to rise significantly in the upcoming months, mainly due to repricing, the weakening forint, tax increases on consumption and higher-than-average consumer energy bills, which could reach 18-20 percent without the price-capping measures. We raise our inflation expectations to 11.7 percent this year, then lower it to 7.6 percent next year, but inflation could be higher than that, driven by global shortages of raw materials, components, international transport prices and the global energy crisis, due to much broader and steeper price increases than expected," added Gergely Suppan.
By mid-summer, adverse international sentiment, global recession fears, the race to raise interest rates and runaway inflation pushed the domestic currency up to the 400-410 range against the euro. The forint could currently be pushed out of this band by the agreement on EU funds or developments in the regional war, and a positive correction of 20 forints is possible if good news were to come.
Wage dynamics are strengthening, the labour market is tightening
Based on the expectations of Hungarian Bankholding experts, wage dynamics could strengthen significantly in 2022 as a result of a 16.1 percent increase in average gross wages, including one-off extra payments, a 20 percent increase in the minimum wage and guaranteed minimum wage, a 20 percent wage settlement across several sectors, and the payment of the six-month service premium for army and law enforcement personnel. Tight labour market conditions may persist in 2023, but wage growth at the economy-wide level may slow to 7.5 percent, mainly due to base effects.
Employment is expected to grow by 0.8 percent in 2022 compared to the previous year, supported by a continued strong economic performance. From 2023 onwards, the momentum is expected to slow down, while the unemployment rate is expected to show a steady decline in the coming years (2022: 3.2 percent; 2023: 3.1 percent).
In addition to favourable labour market conditions, government subsidies (e.g. the personal income tax rebate for families) have contributed to dynamic consumption growth, but consumption growth may slow down substantially in the coming quarters (household consumption is expected to grow by 6.8 percent in 2022 and 2.7 percent in 2023).
Goal is to reduce the general government deficit
The war between Russia and Ukraine has created considerable uncertainty surrounding the current account this year. Analysts expect a current account deficit of EUR 6-6.5 billion this year and EUR 3.3 billion next year, but it could return to surplus in the coming years.
As the economy recovers, the general government deficit could gradually fall back below the 3 percent criterion in the coming years, which has been at considerable risk from soaring gas and energy prices on the markets and a substantial increase in interest expenditure due to rising interest rates. To offset these, the government has introduced an extra profit tax on eight service sectors and announced spending cuts of around HUF 1,200 billion, mainly on public investment and operating expenditure.