Can Hungary avoid a recession this year? How stubborn will inflation be? - IMF publishes new estimates

Hardly any growth this year

In 2023, the Hungarian economy is expected to expand by just 0.5%, from where growth could accelerate to 3.2% next year, the IMF said in its World Economic Outlook published on Tuesday. Compared to their forecast of six months ago (October 2022), the organization's analysts have significantly lowered their expectations, as at that time they were still expecting 1.8% GDP growth this year.

The IMF has also raised its inflation forecast, expecting an annual average increase of 17.7% this year, compared to the 13.3% forecasted in October. However, IMF experts also agree that the pace of price increases will fall markedly in the second half of the year, and that the annual average could even slow to 5.4% in 2024.

Hungary's current account deficit was 8.1% of GDP in 2022 due to surging energy prices, a key vulnerability for the Hungarian economy. According to the IMF, this deficit could narrow to 4.6% of GDP this year and then to below 2% in 2024. It is not clear from the document what energy prices the IMF calculates with, but the forecast is that average world prices could be significantly lower than in 2022.

However, the labour market should remain stable, with the unemployment rate projected to be 4.1% this year, which Hungary has almost reached, and could fall to 3.8% next year.

Is the IMF optimistic or pessimistic over Hungary then?

The IMF has not provided a textual assessment of its forecasts for Hungary, so the best we can do is to decide whether the above figures are optimistic or pessimistic. To do so, it is perhaps easiest to refer to the MNB's latest Report on Inflation, published two weeks ago.

in view of that, the IMF forecast is broadly in line with the MNB's forecast range.

The central bank expects GDP growth to come in between 0% and 1.5% this year, and the government has repeatedly said that it should try to avoid a contraction in the economy. The IMF forecast of 0.5% suggests that this could be achieved. There is already a difference in the forecast for next year, with the MNB estimating 3.5 to 4.5%, meaning it expects a faster and stronger recovery.

As regards inflation, the central bank's expectations in a range between 15% and 19.5% also fit within the IMF's expectations. The same can be said here as for GDP: for 2024, the MNB expects a 3-5% rise in prices, compared with the IMF's forecast of 5.4%. In other words, the Hungarian central bank seems to expect not only a faster economic recovery, but also a sharper decline in inflation.

On the C/A balance, the views differ more greatly, with the MNB forecasting that the 8% gap in 2022 could be "halved" this year, while the IMF's forecast of 4.6% is much more pessimistic.

Cover photo: Getty Images