Economic growth in Hungary slowed from 6.5% in Q2 to 4% (link) in July-September on an annual basis, below forecasts, and it contracted 0.4% q/q for the first time since 2020, preliminary data of the Central Statistics Office (KSH) on November 15 showed.

Adjusted for working days, GDP grew 4.1% y/y as all branches of the economy, except agriculture, contributed to headline growth, lifted by the strong performance of the industry, especially the automotive and electronics sectors, and market services. Detailed data will be published next week.

Headline growth in the first nine months beat analysts' forecasts, rising by 6.1%, which was one of the highest in Europe, Finance Minister Mihaly Varga commented on the data, without making any guidance on 2023. "Hungary’s economy is on track to resist the harmful effects of the war and sanctions", he added.

The preliminary data showed that Hungary’s economy was growing at a clip of 2pp over the EU average and 2.1pp over the Eurozone's growth.

Prior to the data publication, analysts expected a positive contribution from the industry and a slowdown in the retail sector and services, impacted by shrinking real wages amid rising energy and food prices that lifted inflation to a 26-year high of 21.1% in October.

Q3 growth was held back by a sharp decline in agriculture, dragged lower by a dismal maize harvest. For the first time in living history, Hungary may have to rely on imports to cover its domestic needs.

Due to the carry-over effect of the robust H1 data, lifted by pre-election transfers and investments, full-year growth could be closer to 5%, but next year’s outlook is more gloomy. There is consensus that Hungary will fall into a technical recession in Q4 as economic outlooks deteriorate as consumers cut back spending amid runaway food and energy inflation.

Capital expenditures are likely to suffer a blow from the postponement of public investments, and Hungary’s export-oriented electronics and automotive sectors could see the impact of the slowdown at its major foreign markets in the EU.

The economy will bottom out in the first quarter and a significant improvement is expected from the second quarter, supported by improving purchasing power as inflation eases and interest rates retreat. New capacities in the industry could lift output if the global economy recovers faster than expected, analysts said.

Magyar Bankholding cut its growth forecast to below 5% from 5.3% but left its 2023 target unchanged at 0.4%. The European Commission in a recent report raised its 2022 guidance from 5.2% to 5.5% but cut its 2023 estimate to 0.1% from 2.1%. The forecast assumes that Hungary reaches an agreement with the European Commission on the release of EU transfers, which could support the economy from H2 2023.