GDP swings into contraction in Q3

Economy shrinks in Q3, underperforming market expectations: According to a flash estimate, the economy fumbled in Q3: GDP declined 0.8% year on year, contrasting the 1.5% expansion tallied in Q2 and marking the worst result since Q2 2023. The deterioration surprised markets on the downside. On a seasonally adjusted quarter-on-quarter basis, economic activity dropped 0.7% in Q3, deteriorating from the previous quarter's 0.2% decrease and marking the second technical recession in three years.

Deterioration due to agriculture, industry and construction: With regard to production, preliminary data suggests that the annual decline stemmed from weak performances in the agricultural, industry and construction sectors, which detracted about 2 percentage points from the overall result. Meanwhile, the services sector prevented a steeper deterioration but still fell short of market expectations. On the expenditure side, investment was likely weak in the quarter, growth in private spending likely slowed, and public spending potentially detracted from overall growth. Meanwhile, persistently weak exports suggest net exports struggled in Q3. A detailed breakdown is scheduled to be published on 3 December.

Economy set to regain momentum next year but downside risks loom: Looking ahead, GDP is poised for a rebound in Q4, but this will likely be insufficient to compensate for the lackluster economic performance seen in the first nine months of the year, raising downside risks to our current projection for 2024. GDP growth is also set to miss the government’s growth target by a wide margin due to projected contractions in public spending and exports plus a sharper fall in fixed investment. In 2025, momentum should accelerate as domestic demand gathers pace and exports recover. Nevertheless, signs of persistent weakness in household spending and investment call for caution. Additional downside risks stem from lower-than-expected EU demand, rising U.S. tariffs and potential delays to EU fund inflows.

Panelist insight: ING’s Peter Virovacz and Kinga Havasi commented on the outlook: “In terms of GDP growth for the year as a whole, the third quarter figure has dramatically changed the outlook. On the basis of the new data alone, 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%. […] In addition, the increasingly weak performance of the Hungarian economy since the beginning of the year also weighs on growth prospects for next year due to the so-called carry-over effect. […] In other words, it appears that another stimulus package may be needed to reach the lower end of the rather wide growth range (3-6%) set by the government for next year.”

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