Hungary's GDP contracted by 0.8% y/y (chart) in Q3 and by 0.7% when adjusted for seasonal and calendar effects, surpassing even the most bearish forecasts. On a quarter-on-quarter basis, GDP dropped by 0.7%, significantly more than the 0.2% decline anticipated by analysts.

The economy has now contracted for two consecutive quarters, indicating a steeper decline than expected and marking a return to recessionary conditions last observed during the energy crisis in late 2022.

Following the data release, the EUR/HUF exchange rate slipped to 409, its weakest level in two years. 

The Hungarian economy has been one of the laggards of Europe since Prime Minister Viktor Orban was re-elected in 2022 after stoking a pre-election boom. Over the past nine quarters, the economy has shown growth in only three, with contraction in the remaining six.

In Q3 Hungary’s economic performance was the weakest in Europe in both annual and quarterly terms. The 20-country euro area saw annual growth of 0.4% in Q3, while the German economy rose by 0.2% over the same period. This contradicts the government’s claim that Hungary’s weak economic performance is primarily due to soft external demand and a poor showing in the European automotive sector.

The data is particularly disappointing given that neighbouring countries and the EU as a whole posted positive growth during this period, signalling that Hungary is falling behind its regional peers. Analysts are now revising not only their 2024 targets but also their projections for 2025.

The agriculture, industrial, and construction sectors contributed approximately two percentage points to the year-on-year decline, according to a preliminary report from the KSH. Both market and non-market services helped mitigate the decline.

The economy ministry highlighted the positive impact of the logistics, tourism, ICT, and financial sectors on GDP. Economy Minister Marton Nagy elaborated on the anticipated benefits of the government's economic neutrality policy and its 21-point action plan in a detailed statement.

For Q1-Q3, GDP rose by an unadjusted 0.6% and by an adjusted 0.7%, though this increase was from a low base, as the economy contracted by 0.9% last year.

 

 

 

According to ING Bank analyst Peter Virovacz, the Q3 GDP data significantly alters Hungary’s economic outlook for 2024 and 2025. "We should no longer be talking about achieving a 1.5% GDP growth, the government’s latest official target, but rather be cheering for 0.5%," he stated. Should the economy stagnate or shrink again in the last quarter, even this target might be missed.

ING’s 2025 forecast of 2.9% falls below the government’s 3.4% target and sits at the lower end of the 3-6% growth range Prime Minister Viktor Orban had envisaged as achievable following the recent economic stimulus plan. According to Virovacz, the recently announced economic measures are unlikely to lead to a recovery this year. Furthermore, there is no indication of a sudden uptick in external demand or investment in the near future.

While the government is banking on an economic rebound driven by rising consumer spending, the fresh data could dampen consumer confidence, potentially creating a negative feedback loop that would further constrain economic prospects, he added.

Erste Bank will revise its forecast once the Central Statistical Office (KSH) releases the detailed breakdown scheduled for December 3, but economic growth could be between 0.5% and 1%, down from its previous 1.4% target.

In related news, the Finance Ministry submitted new tax legislation to parliament on Wednesday, which would double tax benefits for families with children, extend the preferential VAT rate for home purchases, and phase out some business taxes. The ministry said the government’s tax policy focuses on tax cuts, support for families and businesses, and streamlining the tax system to ensure compliance.