While Hungary is struggling with the recession and the highest inflation in the European Union, it continues to struggle with endogenous and exogenous economic challenges. But even if GDP is expected to contract again in 2023, the recovery is expected to start later this year.
Hungary’s population today is 9.7 million, still a million smaller than in 1980. With the collapse of its economy in the mid-1980s and the fall of communism, Hungary lost many of its foreign markets in Central and Eastern Europe. Many of its factories were closed and by 1993 800,000 Hungarians were unemployed, prompting many to emigrate.
But despite a rocky transition to a market economy, a severe recession stemming from the 2008 financial crisis and frequent clashes between the Fidesz party of longtime Prime Minister Viktor Orbán’s government and the European Union, Hungary’s economy has developed significantly. Its capital Budapest is now a trading hub for Central and Eastern Europe, and Hungary ranks fifth out of 23 countries in Emerging Europe’s 2023 IT Competitiveness Index, up from ninth place in the region in 2022. In 2023 it ranked third in IT -Talents and fourth place in IT infrastructure.
Hungary currently has a long-term issuer default rating of BBB with a negative outlook from Fitch. Fitch notes that high fiscal spending ahead of the April 2022 elections and “the cost of energy support measures led to the second-highest fiscal deficit of any EU-rated state in 2022,” while inflation “remains the highest in the EU due to price caps.” proved ineffective and increased fiscal costs, while monetary policy transmission is hampered by targeted mortgage rate caps.”
The highest inflation in the EU
While high energy costs and other supply chain disruptions due to the war in Ukraine were being felt across emerging Europe, Hungary outperformed its peers in March with an inflation rate of 25.2 percent year-on-year. Household energy prices rose 43.1 percent, while staple food prices were even higher: 67 percent for bread, 72.8 percent for dairy products and 74 percent for eggs.
dr Sándor Richter, senior researcher at the Vienna Institute for International Economic Studies (wiiw) and author of the April forecast for Hungary, tells Emerging Europe: “The reasons for the high inflation are partly consistent with the situation in other countries: the skyrocketing costs for imported energy and the effects of the war in Ukraine.”
“But there are also more country-specific reasons,” says Richter. “Most importantly, until early 2022, during – and even before – the Covid pandemic, the government pursued loose monetary and fiscal policies aimed at maintaining a ‘high-pressure economy’; And the exceptional public spending surrounding the 2022 election topped it off.”
Food inflation was also exacerbated by a notably poor harvest in 2022, when agricultural value added fell 31 percent. Despite an expected good harvest this season and improved external balances due to lower energy prices, Richter expects GDP to fall by 0.5 percent in 2023. Consumption and investment remain low and the budget situation remains poor.
“The government is struggling to keep the budget deficit under control while interest rates on the national debt are rising sharply,” says Richter. “The central bank has launched cautious easing of monetary policy: caution is warranted as the forint could weaken dangerously if markets feel the rate cuts are too early or too big.”
Consequences for the dispute with Brussels
Despite these problems, the Orbán government’s popularity remains stable as it redirects inflationary anger over the war in Ukraine and the EU’s sanctions on Russia — banning imports of Ukrainian grain this spring. Brussels and Washington often criticize the illiberal government’s dealings with non-governmental organizations, democratic backsliding, insufficient judicial independence and the rule of law, the investigation of numerous suspected cases of corruption, and heterodox foreign policy.
The EU successfully used access to its funds to secure Hungarian approval for a late 2022 aid package for Ukraine. However, since Orbán has no interest in making the reforms substantive enough to please Brussels, the release of other suspended EU transfers is likely to be delayed even further.
Richter: “The continued suspension of a significant part of EU transfers jeopardizes the government’s fiscal targets, depresses aggregate demand and stands in the way of achieving more comfortable levels of international foreign exchange reserves.”
If Hungary’s economic woes continue, the country could continue to lose its best and brightest, who often leave the country in search of better opportunities abroad.
“Brain has become a major problem with the brain drain of the most capable young professionals, particularly in occupations where wages are relatively low even by domestic standards,” says Richter.
But even if Hungary’s economy will contract this year, there is hope. The economy is likely to recover in recent months and the wiiw forecasts that GDP growth will return in 2024, albeit at a modest 1.5 percent.
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