Hungarian Bankholding expects inflation to hit 11.7% this year

Analyst Gergely Suppan predicts GDP growth of 5.7%t this year and 2.7% in 2023 due to the protracted war, a deteriorating external environment, rising interest rates, the partial removal of preferential household energy prices and severe drought damage this year.

"The outbreak of the war in Ukraine is worsening domestic growth prospects through a number of, largely indirect, effects. The indirect effects are most likely to be felt through disruptions in supply chains and, closely related to this, through price pressures spilling over from abroad. There is considerable uncertainty that the duration and outcome of the war, the further escalation or, in a favourable scenario, the easing of sanctions, remain unknown. Their impact on production chains, energy, raw material and food supply is unpredictable," said Suppan, the head of macroeconomic analysis at Hungarian Bankholding.

The expected slowdown in the global economy - due to the increasing recessionary outlook in some leading economies, rising inflation and the intensifying monetary tightening to counteract it - is overshadowing the growth outlook. Growth is also being negatively affected by the partial removal of preferential household energy prices and is being held back somewhat by falling agricultural production due to the extremely severe drought.

However, the domestic outlook is favorable by international standards, with double-digit wage growth and household transfers expected this year to outpace significantly higher-than-expected inflation. The latter is being held back by domestic price constraints, so real incomes could rise again this year, contributing to consumption growth.

Against this backdrop, Magyar Bankholding's experts do not expect a recession in the base case, but quarter-on-quarter growth in the second half of the year could come close to stagnation. Nevertheless, the possible cut-off of Russian gas supplies to European countries poses a substantial risk to growth, as it could force a number of sectors to shut down, which would also sharply reduce domestic production.

Inflation could rise further

"Inflation could continue to rise significantly in the coming months, mainly due to repricing, the weakening forint, tax increases on consumption and higher-than-average consumer energy bills, which could reach 18-20% without price-capping measures. We raise our inflation expectations to 11.7% this year and 7.6% next year, but inflation could be higher than that, driven by global shortages of raw materials, raw materials and parts, soaring international transport prices and the global energy crisis," Suppan added.

By mid-summer, the unfavorable international sentiment, global recession fears, the race to raise interest rates, and runaway inflation pushed the domestic currency up to the 400-410 range against the euro. The forint could currently be pushed out of this band by the agreement on EU funds or developments in the regional war, and a positive correction of 20 forints is not unthinkable if positive news were to come.

Stronger wage dynamics, tighter labor market

In 2022, wage dynamics could strengthen significantly, based on the expectations of the company's experts, as a result of a 16.1% increase in average gross wages including one-off extra payments, a 20% increase in the minimum wage, and guaranteed wage minimum, a 20% wage settlement across several sectors and a six-month salary increase for professional staff. Tight labor market conditions could persist in 2023, but wage growth at the economy-wide level could slow to 7.5%, mainly due to base effects.

This year, employment is expected to expand by 0.8% year-on-year, supported by a continued strong economic performance. From 2023 onwards, the momentum is expected to ease and, in parallel, the unemployment rate is expected to show a steady decline in the coming years (2022: 3.2%; 2023: 3.1%).

In addition to favorable labor market conditions, government subsidies (e.g. the personal income tax rebate for families) have contributed to the dynamic expansion of consumption, but consumption growth may slow down substantially in the coming quarters (consumption is expected to grow by 6.8% in 2022 and 2.7% in 2023).

Gov't aiming to reduce deficit

There is considerable uncertainty surrounding current account developments this year due to the war between Russia and Ukraine. Analysts expect a current account deficit of EUR 6-6.5 billion this year and EUR 3.3 bln next year, but it could return to a surplus in the coming years.

As the economy recovers, the general government deficit could gradually fall back below the 3% criterion in the coming years, which has been at considerable risk from the sharp rise in gas and energy prices on the market and a substantial increase in interest expenditure due to rising interest rates. To offset these, the government has introduced an extra profit tax on eight service sectors and announced spending cuts of around HUF 1.2 trillion, mainly on public investment and operating expenditure.