Economy 31 March 2022, 2:10pm

Hungary gov't seems to be halving growth forecast for 2022 due to war

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The war-related sanctions are having a negative impact on both the European and Hungarian economies, and after last year's growth of more than 7%, Hungary's GDP may expand by 3-4% this year, Finance Minister Mihály Varga said in an interview with weekly Figyelő published on Thursday. This means the government's growth forecast for this year has been halved in a few months.

Parliament originally approved the 2022 budget last summer with a 5.2% GDP growth estimate. But by the end of last year it revised its projection upwards to 5.9% in view of better-than-expected macroeconomic developments.

The war Russia is waging in Ukraine, the Western sanctions imposed on Russia and their consequences are not leaving the Hungarian economy unfazed, though. Finance Minister Varga Mihály has already indicated in an interview last week that the growth forecast before the war is no longer sustainable and that plans need to be revised. He said the most important task after the elections would be to adjust public finances to the economic difficulties caused by the war.

In an interview published in weekly Figyelő on Thursday, the minister elaborated on this. He said that the previous growth forecast had to be reconsidered because the inflation trajectory had changed and the influx of half a million Ukrainian refugees so far required extraordinary measures.

The 3-4% growth rate for this year varga mentioned is half the 5.9% GDP growth forecast made at the end of last year.

This is not at all surprising or unexpected, if we only consider that Germany, the largest export market for the Hungarian economy, has just lowered its growth forecast and cannot even rule out recession.

It is difficult to estimate what impact the sanctions on Russia will exert on the Hungarian economy, acknowledged Varga. "However, we are also prepared for this period: the domestic economy is currently characterised by a high savings rate and a low level of credit. This could also mean that our companies are able to expand capacity and households can maintain consumption levels," he added.

The budget will not be allowed to slip

, stated Varga, suggesting that intervention and fiscal adjustment may be necessary. However, he did not envisage a new series of steps and did not specify what fiscal measurs might be needed.

We have addressed the risks in this year's budget in the articles below:

EDP Report coming up - KSH presents teaser

Central Statistical Office (KSH) Deputy CEO László Windisch told state newswire MTI on Tuesday that the the stats office had confirmed its previous first estimate of annual GDP in 2021. According to these, the Hungarian economy grew by 7.1% last year.
He reminded that the KSH will publish the EDP report on the 2021 budget balance and general government debt on Friday this week. It is already clear that the higher GDP is having a positive impact on both indicators, he said. Such a preliminary announcement by a KSH official is highly unusual.
The budget shortfall could have remained below 7% of GDP, while government debt could have fallen below 77% of GDP, he said.
This is the second largest debt-to-GDP reduction in the last 10 years, with Hungary managing to reduce its debt by almost 3% of GDP last year.

Varga has spoken only in general terms about measures previously announced with the aim to shore up the budget. He called it a good decision to increase Hungary's financial reserves at the end of last year, to cap ministry spending at HUF 350 billion, to not allow ministries to spend their entire 2021 budget, to put off the launch of HUF 755 billion worth of investments and to lower this year's deficit target to 4.9% of GDP from 5.9%.

Varga also said that the non-reimbursable part of the EU recovery programme is worth HUF 2 billion, and that the loan part will also be tapped. He said that a large part of the money would also be used for developments such as energy reform, diversification and green transition.

The finance minister concluded by underlining that the government's position on the euro remains unchanged. "We are committed to the introduction of the single currency, but first we need to strengthen the Hungarian economy."

The war on Ukraine will have a severe effect on economies far beyond the immediate area of the conflict, according to new research published by the European Bank for Reconstruction and Development (EBRD) on Thursday. Describing the effects of the war as ‘the greatest supply shock since at least the early 1970s,’ the Bank predicts that the increased cost for commodities such as food, oil, gas and metals will have a profound impact on economies, particularly those in lower income countries.

According to the EBRD's revised forecast, Hungary's GDP is expected to grow by 3.5% this year, 1.3 percentage points slower than in the previous estimate.