Economic output in Q2 rose 1.5% year-on-year (chart) in April-June and was up 1.3% when adjusted for working days, missing the 2.4% consensus, according to preliminary data from the Central Statistics Office (KSH) on July 30.

Prior to the release of the data, analysts were expecting that household consumption would drive growth, however, the preliminary data suggests that it was a drag on growth.

In its short commentary, KSH said economic growth was lifted by the construction sector and real estate transactions, and value-added declined in the industrial sector.

Hungary came out of recession in Q3 2023 after four consecutive quarters of contraction, followed by a year-end stagnation and a sharp 0.8% rebound in the first quarter. 

Economy Minister Marton Nagy in an interview last week flagged that the Q2 growth targets were under threat because of weak external demand. After the KSH data, he said the protracted war in Ukraine and the EU’s competitiveness problems are to blame for the disappointing industrial data. Hungary’s open economy is heavily dependent on the automotive and EV battery industries and has been affected negatively by the recent slump in demand for electric vehicles.

According to Nagy, rising real wages are cause for cautious optimism, reflected in the steady growth of retail sales in the last five months.

Finance Minister Mihaly Varga also noted that external conditions remained unfavourable and pointed to government measures to strengthen the fiscal balance. The latest GDP forecasts of the IMF and the European Commission put Hungary among the frontrunners in 2025, he added.

GDP grew 1.5% y/y in the first half and economic performance needs to accelerate in H2 to meet the revised 2.5% target of the government, analysts noted. Hungary’s economy is facing challenges from weak external demand as Germany's output, the country’s largest trade partner fell 0.1% in Q2.

Overall, the latest GDP figures have been a negative surprise and reflect the slower recovery of household consumption despite near double-digit real wage growth since September.

Consumers remain weary of committing to big-ticket purchases, which analysts attribute to galloping inflation and recession in 2023. The subsequent shortfall in VAT revenues is also bad news for the budget. 

The construction sector, while showing an upward trend, has shown volatility and is primarily driven by corporate investments. The postponement of state infrastructure projects due to fiscal considerations also weighs negatively on investments. Unlike last year, the contribution of agriculture to growth will be below last year’s level, when outstanding crop yields lifted output, from a low base.

The outlook for the remainder of the year remains uncertain and most analysts say GDP will be close to 2%.

The forint weakened 0.5% to 394 and stocks also fell after the data. 

The KSH will release detailed figures on September 3.