UniCredit Predictions on Growth, Inflation and EUR/HUF

BBJ: How is weak growth in Europe affecting the Hungarian economy? Do you expect this to pick up in 2024?

Dan Bucsa: One of Europe’s biggest growth drivers has been the precautionary savings accumulated since COVID. Because of government transfers, households and companies could make these savings, but these have been fully spent. Some of this was used to pay debt, so households and companies are in a better position than before COVID. The extra consumption has taken all the extra savings, and now we are back to long-term savings rates in Europe and below that in the U.S., where the rate is very low. And that means demand for products from our region is likely to go down.

Regarding the supply side, all energy-intensive companies across Europe have had to cut back because of higher energy costs. We’re not seeing that production is coming back in many cases. So, European production has decreased, especially in Germany, which is down by almost 20%. This is affecting supply chains and suppliers from Hungary and Central Europe generally.

Going forward, what gives us some optimism is real wage growth. Wages are outpacing inflation now, both in Western Europe and our region, and we should see this spur an increase in demand by the end of this year. The second thing is lower interest rates: we think that lending will come back gradually, probably more in the second half of 2024.

On the domestic side, the biggest drag we’re seeing is from fiscal policy because it has been very lax across Europe. In 2024, the European Commission will return to employing the excessive deficit procedure, and we think that most countries in our region will be in the EDP by the end of 2024 because they will not manage to reduce their budget deficits in time.

Overall, we’re seeing the Eurozone growing by less than 1% next year, the U.S. by around 1%, and global trade growing between 1-3%, which for our countries means a natural drag on growth of at least 0.5-1 percentage points. Hungary is one of the most exposed countries to this trend.

BBJ: What Hungarian-specific factors might push inflation here higher next year than elsewhere in Europe?

Zsolt Becsey: I’d like to begin with a little bit of economic theory. Less developed countries tend to have higher inflation than developed ones. They grow faster, which comes with higher inflation. To have higher inflation in a developing country is quite normal; the extent is what we are looking at here.

And the reason why I think Hungary will probably experience higher inflation than the bulk of the region, but certainly higher than in Western Europe, is the budget. Why? For many reasons. As Dan mentioned, to boost the economy, the budget needs to spend above the Maastricht threshold.

But I think the most important question here is the budget structure: it’s very reliant on indirect taxes on consumption, like VAT and excise duty. The Hungarian budget is one of the most dependent on these kinds of incomes: if we’d like to see the budget in balance, it needs additional consumption. This will have to come from somewhere, so it will probably arrive from real wages, or perhaps some kind of transfer will generate additional spending. The bottom line is that whatever happens with consumption, whether it is growing fast or very fast, will be inflationary.

The other reason why I think Hungarian inflation will be higher than elsewhere is that we already have a few elements pre-announced by the government. Most of these will come live from Jan. 1, and these add roughly 1.4 percentage points to inflation. The most important element is the excise duty increase on vehicle fuels, but also the highway toll increase, and the introduction of the EPR, the Extended Producer Responsibility system. The biggest part lies on the manufacturing sector; manufacturers will need to pay for the packaging that they use. There are only broad estimates on how much that will cost on the national level, but it will certainly add a lot.

We forecast that the budget deficit will be between 4-5%, maybe nearer 5%, of GDP next year. This means additional income will have to come from somewhere, and it could come from taxes, which will add to inflation.

BBJ: Where do you expect the EUR/HUF rate to move in 2024?

Attila Csáky: We think the currency shouldn’t weaken much in the course of next year, but we are counting on a weaker currency than we see on the screens right now. The forint has been strengthening a lot, but practically, there is still much uncertainty, including about EU funds and, of course, also the relative position of the Hungarian market versus the global, meaning how persistent the currently elevated rates may prove, and how the central bank can react to that.

We advise clients to hedge their exposure in terms of FX and commodities but to hedge in excess of 50% of what needs to be hedged, not 100%. Currently, the EUR/HUF interest rate differential has come down significantly. Even for importers, hedging forward exposure on the euro is not as expensive as over the last year, when the peak was HUF 60 for one year; now it’s down to HUF 20, and hopefully, it can get even lower.

Of course, exporters have enjoyed the difference between the forint being high yield and the euro lagging. They have been very active and have done a great job hedging their exposures because when the EUR/HUF reached the HUF 430 level, we had some exporters who hedged at HUF 490.

BBJ: Do you expect any big moves in commodity prices over the next 12 months? Can UniCredit clients hedge against these risks?

ACs: We offer the whole range of hedging, including energy, gas, and electricity hedging. Something new, just starting, is HUPX-based hedging. The Hungarian energy sector is pegged to the Hungarian electricity stock exchange index, HUPX, and we can now offer that to clients and hedge even to calendar year 2025. We think this will bring a lot of client interest. We are also active in base metals, mainly aluminum; there are a lot of manufacturing companies, automotive, food and beverages, across the country that use extensive amounts of aluminum.

This article was first published in the Budapest Business Journal print issue of December 1, 2023.