Abysmal GDP data arrived, Hungarian economy contracts again
The Hungarian economy is clearly failing to gain the dynamism that many expect. Since 2022, we have seen an overall stagnation in performance, with alternating quarters of contraction and low growth.
The economy has contracted in 7 of the last 11 quarters and in 4 of the last 6.
For example, there was a technical recession in mid-2024 (i.e. two consecutive quarters of falling GDP), from which we emerged by the end of the year. Apparently only temporarily for the time being, as we are already seeing another contraction.
The figure is below not only analysts' expectations but also government expectations. Minister of National Economy Márton Nagy expected a “tiny” economic growth.
The impact of the trade war (and the resulting uncertainty) may have been only partially reflected in the first quarter GDP data, as the real escalation occurred in early April. Therefore, the first three months' developments were more likely to be determined by the continuation of trends that were typical of previous quarters. Accordingly, household purchasing power growth is contributing to the expansion of the economy mainly through the expansion of the services sector, while weak external demand is holding back industrial exports. Given the structure of the economy, Germany's near-recessionary state is really hurting. It is unlikely to have rebounded sharply after the sharp fall in investment in recent quarters, as business confidence remains weak, EU funding has continued to fall and tax-financed public investment is constrained by the poor fiscal position. Looking at today's GDP data, we think there is a good chance that the investment freefall has continued.
A more detailed picture of first-quarter economic performance will be available in the detailed GDP report in a month's time. Since the KSH publishes its flash estimate 30 days after the period (“t+30” instead of “t+45”), we are even more in the dark, as we do not yet see the monthly partial data for March.
At the time of publishing the first estimate, the statistical office only adds a brief assessment of the data, which now reads "Gross domestic product was positively affected by the combined output of services. The economy's performance was held back by the industrial and construction sectors."
These sentences refer to the year-on-year change in the GDP growth figure, which is 0% according to the crude index (the expectation here was also for a 0.3% increase), but adjusted for seasonal and calendar effects, the economic contraction is 0.4%. KSH's release fits into the big picture: household consumption in the services sector can provide growth, but it is by and large the only growth engine, which is not sufficient to offset the downward effects. (The annual index is, by the way, even less indicative than usual now, because of the impact of last year's leap day and the holidays, especially the moving Easter, it is worth focusing on the quarterly indicator, see our accompanying article at the end.)
Looking at the performance of the domestic economy from a broader perspective, the shocks of the 2020s have once again permanently knocked Hungary off its development path.
Fresh data for the first quarter further dampen the outlook for GDP growth this year. To achieve the government's GDP growth target of 2.5%, we roughly estimate that output would need to improve by close to 2% (quarter on quarter) over the next three quarters. This would represent a boost so unprecedented that it seems virtually impossible. With quarters of 0.8-0.8%, which in the light of the past period have been extremely dynamic, average annual GDP growth would be less than 1%.
In addition, the outlook is surrounded by negative risks such as an escalation of the trade war, drought or the spread of foot-and-mouth disease. We do not want to sound alarm bells at this stage, but we would point out that if these risks were to materialise, it would not take much of a shock to call into question whether the GDP growth figure for this year remains positive.
In a context of persistently weak economic performance, the question is how long the spectacular labour hoarding behaviour of companies will persist. After many years of a labour shortage environment, firms appear to be resorting to redundancy only as a last resort.
KSH publishes several quarterly GDP indicators in its report. The most important is the change compared to the previous quarter, the so-called quarter-on-quarter (qoq) GDP index. In most countries in Europe, this is the main figure and Portfolio tries to treat this figure as a priority because of its beneficial properties. Due to the different economic structure of each quarter (weather-dependent activity, holidays, working days, etc.), this indicator is seasonally and calendar-adjusted. Although this indicator has the unfortunate feature of end-point weakness, i.e. the fact that the figures change several times afterwards due to the nature of the seasonal adjustment, it is still very useful as a short-base business cycle indicator.
There are three types of index (annual, yoy) compared to the same quarter of the previous year: the raw, the calendar-adjusted (wda) and the seasonally and calendar-adjusted (swda). Of these, Portfolio has consistently monitored the seasonally and calendar-adjusted index (swda) as a headline index since 2016. This is because the number of working days (especially if there is a leap day in the subject or base period) has a significant impact on performance, which is definitely worth correcting for. In addition, seasonal adjustment for annual indicators 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 we consider it as the main figure.
The unadjusted annual index is worth watching because analyst forecasts are based on this number, so the surprise factor in the recent data can be measured on this (along with the qoq data).
Cover photo (for illustration purposes only): Getty Images
