Research Briefing | Nov 17, 2022
EU funding cuts could trigger an economic crisis in Hungary
The Hungarian economy is being hit by a perfect storm of shocks, particularly surging inflation and a weakening currency. Our baseline forecast already anticipates a recession over the winter and inflation staying elevated for some time. But risks of a more severe scenario are rising.
What you will learn:
- If a number of catalysts – especially the cut-off of some EU funding – crystallise, Hungary could enter a period of macroeconomic instability not seen since 2008. In this scenario, we think the economy would shrink 1.3% next year, and GDP would stay 3% below baseline into 2025. At the same time, policymakers fail to bring inflation back to target until as far away as 2027.
- The biggest risks in a severe downturn scenario stem from inflation getting out of hand. In September, headline inflation breached the 20% y/y threshold – the first out of the larger CEE countries. Worryingly, it shows little signs of abating. But a slower-than-expected decline in inflation, not least due to the weaker forint, would lead to inflation expectations fully de-anchoring. This, in turn, would weigh on asset valuations and amplify economic instability.
- Other threats are no less serious. The standoff with the EU could curtail Hungary’s access to a vital source of investment financing. This could drag public investment down by around 25% relative to the baseline, weighing on potential output. Hungary’s swelling external imbalance – the current account deficit is wide (currently over 6% of GDP) – makes the economy especially vulnerable to this kind of shock.
European Cities and Regions Service
Regularly updated data and forecasts for 2,000 locations across Europe.Find Out More
European Macro Service
A complete service to help executives track, analyse and react to macro events and future trends for the European region.Find Out More
Global Macro Service
Monitor macro events and their potential impact.Find Out More