Let's see how Hungary might avoid recession in 2023

In the second quarter of this year, Hungary's economic output was 0.3% down on the previous quarter. This was well below expectations, and the country is now stuck in recession for the fourth quarter (the longest so far).

Real GDP in the first half of the year was 1.7% below the same period in 2022. The government's official (albeit already seldom voiced) target is for 1.5% annual average growth, which already looked unlikely before yesterday's release of the Q2 data. The minimum expectation is to "avoid a recession" this year, which in economic policy terms means that the year-on-year GDP change in 2023 should be positive. But what performance would be needed in the second half of the year to turn the 1.7% contraction in the first half to 0% or possibly even to +1.5%? We have done some simple calculations to answer this question.

Major turnaround

First, it is worth looking at recent trends in economic growth. As shown in the chart below, the recovery from the coronavirus crisis stalled in the second half of 2022, and since then GDP has been on a slight downward trend, with quarter-on-quarter contractions of between -1 and -0.3%.

Of course, it is obvious that the economy will have to grow in the 3rd and 4th quarters to make up for the first half of the year. To achieve an average GDP growth of 1.5% in 2023, the Hungarian economy would really have to take off, according to our calculations, something like this:

Just how sharp a turnaround this is is shown by the fact that the 1.7% contraction in the first half of the year should be replaced by a sudden 4.7% growth in the second half. This seems impossible even knowing that the recession in the second half of 2022 already implies a lower base. Our sense of "mission impossible" is even stronger when we calculate the exact slope of the grey line seen above, i.e. how much growth is needed quarter by quarter. About 3.8%, twice in a row:

This means that average annual GDP growth of 1.5% by 2023 could be achieved if, after the contraction of the past four quarters, economic output in the third quarter jumps by nearly 4% year-on-year and then shows another improvement of nearly 4% in the fourth quarter.

Our graph above shows (look at the green columns) that the economy has not been anywhere near this desirable pace recently. In fact, since 1996 (that's as far as our time series goes back) we have never seen the economy show even a similar momentum in two consecutive quarters. Of course, it's no wonder; growth of around 4% is already a pretty good result for a year, let alone a single quarter.

The above calculations have been done also under the assumption that we are not targeting 1.5% GDP growth this year, but only "recession avoidance", i.e. 0.1% annual average GDP growth. Of course, a much smaller rebound would suffice for this, but it still represents an extreme recovery:

The pace of expansion should be around 2% in each of the third and fourth quarters, so that the second half of the year would already be 2% ahead of H2 last year, and real GDP this year would be a hair above the 2022 print. Such a momentum would be enough to push already the Q3 performance above that of a year earlier.

Looking beyond technical factors

An economic growth rate of 2% for the next two quarters would still represent a historically strong period of growth, with the exception of the post-Covid recovery period, which is unprecedented in the country. What are the fundamental factors that could underpin such a 'recession-proof' recovery?

• On the one hand, experience shows that the end of recessionary periods is followed by a recovery phase with faster-than-average growth.
• Inflation in the Hungarian economy is on the retreat, so real earnings could start to rise on an annual basis from the autumn.
• Interest rates are falling, which could improve the supply of funds.
• The most important factor is a technical one: this year's agricultural performance will be much better than last year's, as the drought of 2022 hit farming hard. We don't know yet how the KSH will break down this year's better performance between quarters (we don't even know the second quarter agricultural GDP due to lack of detailed data), but if it accounts for most of this effect in the second half of the year, it could represent a significant one-off boost to the GDP indicator.

• A lot of investments in capacity expansion are still in the pipeline (e.g. battery factories), which could bring leaps and bounds in growth when their kick off production.

Despite these upside factors, analysts are becoming less confident that GDP growth in 2023 will be in positive territory. Disappointing second quarter figures have raised doubts about whether the economy has the necessary momentum.

Moreover, the way it looks now, the external environment may not be very supportive either. In the world's largest economy, the Federal Reserve is sticking to its tight interest rate policy, and meanwhile there are a growing number of weak links in the world that are proving vulnerable in a high interest rate environment. European growth is decelerating, the U.S. has debt problems that credit rating agencies are already taking note of, and China is trying to revive its spectacularly cooling economy amid serious financial stability concerns.

Moreover, the scope for domestic economic policy stimulus is limited. A more vigorous pace of interest rate cuts could again erode the stability of the forint, the budget is still facing adjustments rather than stimulus measures, and it seems that EU funds are unlikely to start flowing in the near future.

In light of all this, it can be ruled out that the 1.5% annual average GDP growth in 2023 will be achieved, and it will even take a lucky break for the indicator to creep into positive territory. On the basis of currently available information, a mild recession this year seems more likely.

Cover photo: (c) Tuomas A Lehtinen via Getty Images