Latest GDP data shows recession ends in Hungary
When publishing the preliminary data, the KSH releases only the main figures therefore we have no information on the specifics. The stats office only said that "the [0.3%] decrease in the economic performance was mostly owing to falls in industry and market services, within which latter mainly in wholesale and retail trade as well as scientific, technical and administrative activities. The good performance of agriculture lowered the reduction. The decrease in the value added of services was partly offset by a significant growth in section human health and social work activities."
In the light of the monthly data, the 0.9% increase in GDP compared to the previous quarter was driven by the manufacturing sectors. At least there was likely an improvement in industry, construction (minimal) and agriculture.
Based on the above, the big economic picture may look as follows: household consumption and investment are weakening due to tight domestic demand, and export performance is improving, but this has not been enough to keep the economy growing compared to a year ago.
A very significant contribution to the change in GDP was made by the small-weight agriculture, which delivered strong crops this year after an extremely meagre last year. In the second quarter, the agricultural sector pulled the annual GDP index up by 1.7 percentage points, and the impact in the third quarter was probably at least as large. This means that the economy outside the weather-dependent agriculture could still have contracted by around 2% on an annual basis, and only farming helped correct this to a 0.3% contraction.
Together with today's data, the KSH has also slightly modified previous readings, with revisions resulting in the 0.2% quarter-on-quarter contraction in Q2 pulled up to stagnation (0%). In fact, the recession ended not now but in the previous quarter, i.e. the recession period lasted for three quarters, not four.
The latest data suggest that the Hungarian economy is set to contract this year as a whole. The first three quarters of the year saw a -1.2% change in GDP, which the last quarter will not be able to pull back into positive territory. Based on today's data, it is not even certain that the year 2023 will be no weaker than the consensus market forecast of an annual average contraction of 0.5%.
We'll certainly see a better performance next year, though. The key change is that while falling real wages this year due to high inflation have inhibited household consumption, we can expect a turnaround next year. Wages are expected to expand at a double-digit annual rate in 2024, while average inflation will recede into the 5-7% range, meaning household purchasing power will strengthen.
However, the outlook is clouded by several factors.
Investment will be restrained by high interest rates early next year, and even more so by the fact that the dire state of the state budget is putting infrastructure development on the back burner. However, the situation could be helped by the release of EU funds, although there is still uncertainty about when the frozen funds will be finally transferred. The cooling global economy is also a risk factor: Europe and China are not in good shape for various reasons, and this has already had a noticeable negative impact on exports in recent months.
With so many risk factors, it's no wonder that GDP forecasts for next year are very mixed, depending on how strong a recovery analysts project. Average annual GDP growth forecasts are in a wide range between 2.1% and 4.3%.
GDP growth in many forms - How we look at it
The KSH publishes several GDP indicators in its report. There are three (annual) indices compared to the same quarter of the previous year: raw, working-day adjusted and adjusted seasonally and for working days. Of these, the Portfolio has consistently considered the seasonally and working-day adjusted index (swda) as the headline index since 2016. This is because the number of working days (especially if there is a leap day in the reference or base period) has a significant impact on performance, which is definitely worth correcting for. In addition, seasonal adjustment for annual indicators only makes sense if the nature of seasonality within the year changes. Since Eurostat refers to the swda figure for all countries, it makes international comparisons easier if this is taken as the main figure.
The (quarter-on-quarter) GDP index relative to the previous quarter is, of course, always seasonally and working-day adjusted, as each quarter has a very different weight and structure within GDP, otherwise it makes no sense to expect growth. In most places in Europe, this is the main number and Portfolio tries to treat this number as a priority because of its favourable characteristics. However, this indicator has the unfortunate feature of end-point weakness, i.e. that due to the nature of seasonal adjustment, the numbers change several times afterwards, but it is still very useful as a short-base business cycle indicator.
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