Bank analysis: After Slowing Growth in 2023, GDP Appreciation for This Year Could Approach 3%

According to OTP Bank analysts, the local economy experienced weaker growth in 2023 than previously anticipated. Nevertheless, some lights are visible at the end of the tunnel: after expanding by 1.5% in 2023, 2024 growth could be close to 3%. The outlook for this year is mostly influenced by the recovery in consumption due to higher real wages, the pace of construction activity and developments in the euro area.

Hindered by weaker consumption, and lower exports, GDP growth in the first 3 quarters of last year reached just 1.4%. Consequently, the full year 2023 GDP growth could have been around 1.5%. At the same time, inflation declined sharply last year, after starting at 15.1% in January, the December rate reached 6.6%. Still the NBR held the base rate at 7%, as the disinflation halts temporarily in the first half of 2024.

The Q1-Q3 GDP performance was fuelled by IT, and construction sectors, and professional services, while the industry, which takes more than 20% of the GDP formation had a negative contribution. The HORECA sector had a good start in Q1 but experienced a severe slowdown from Q2. At the same time, there was a recovery in the agricultural sector, after the sharp decline in 2022.

2023 Q4 monthly data so far suggests, that the growth slowdown probably bottomed out and a gradual recovery has started, driven by real wage growth, due to falling inflation. In 2024, the GDP growth pick-up to around 2.8%, driven by household expenditures, and a gradual comeback in the export’s dynamics, while investment growth will remain solid.

“Considering last month’s evolution, Q4 indicators suggest the growth slowdown probably bottomed out and a gradual recovery has started, primarily driven by real wage growth, due to falling inflation. The developments we have seen so far is driven by household demand, the solid activity of the construction sector implying increasing investment expenses, out of which a large part is financed from non-reimbursable EU funds.” reported OTP Bank analysts.

Inflation has been on a steady decline starting February 2023 and reached 6,6% in December, 2023. From January, the disinflation probably turned back temporarily due to fiscal tax measures.

“January likely brought a temporary turnback in disinflation, on account of the fiscal measures implemented. Somewhat higher oil prices also contribute to halting disinflation in the first quarter of this year. Our forecast shows that service price and goods inflation will remain relatively stubborn, while food price inflation will continue to decrease.”

Despite this year’s fiscal consolidation measures, the budget deficit will remain close to 6% of GDP, given the new pension law and election related spending. A more visible fiscal consolidation could start from 2025, but further measures are required to reach the 3% EU deficit target.

In the European context, the ECB has warned that markets must expect higher interest rates for longer, and should not hurry with the expectation of rate cuts. Considering the local disinflation expectations for the beginning of 2024, it is not likely that the National Bank will begin reducing the reference rate before the summer.

“The NBR has been carefully watching the inflation/benchmark rate balance throughout the year, trying not to hinder the local economic activity while forcing inflation as low as possible. Future developments would demand continuing this tight control, and given a temporary halt in disinflation, the central bank could keep the rate at the current level until the second half of 2024”.

Though the economic performance has weakened, the labour market has remained relatively robust in 2023, with low unemployment. Real wages have managed to rise sharply as inflation decreased, and wages are further fuelled by the minimum wage hike of last October, and another one probably in July, 2024.

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