Energy import prices look much lower than expected for now
In our latest forecast, released last month, we predicted rising energy import prices, as the weather is getting back to its normal seasonal track after the unusual warm weather recorded this winter. Indeed, winter is approaching its end, and the weather is not that exceptionally warm anymore in Europe, yet gas and oil import prices even fell further slightly, rather than going up as expected. For sure, the European situation of energy supplies is still far from being convenient and risk-free, but it seems that efforts to replace the former Russian shipments have been quite successful, and the import bans and price caps on the purchase of Russian oil appear to be effective.
Lower-than-expected energy prices should lead to an improving balance of payments in 2023. Already in our January forecast, we predicted that the current account deficit ratio would fall to less than half of last year's. However, should current energy import prices remain in place for the whole year, it would reduce the deficit ratio further, to hardly anything. Once again, there is no guarantee for this golden scenario to materialize, but with time passing without any sign of an energy market correction, this year’s BOP outlook is slowly shifting in the favorable direction. It is really high time for that to happen, as the preliminary BOP data for 2022 look quite poor, despite the notable improvement in December.
Another area of potential improvement if gas, oil and electricity imports remain relatively cheap is fiscal sustainability. Although large amounts will have to be paid out of the government budget on energy subsidies, the running cost of the subsidy scheme should fall markedly in this case. Indeed, the unsubsidized part of gas consumption by households is way overpriced already, allowing service providers to cover their losses on subsidized sales and the government to reduce its compensatory payments to service providers.
Lower energy prices must be good news also from the inflation point of view, of course. However, some caution against excessive optimism is needed. First, enterprises have come under an intense profit squeeze in the past year or so, and most probably they will not be in a hurry to pass their early gains in energy costs on to customers. Similarly, the government is unlikely to reduce administrative energy prices for households as quickly as it could, exactly with a view to reducing the burden on its budget.
But even so, CPI-inflation is widely believed to have peaked in January, and we agree with the broad analyst consensus on that. From its current very high level, the headline rate is likely to decrease at a moderate speed in H1, to be followed by an accelerated rate of further reductions in H2. We still see the headline rate somewhere near the borderline between single and double-digit figures at year end. Besides energy prices, one notable uncertainty is when and how the existing administrative price caps on basic food items will be removed. The latter is increasingly likely to happen this year, as the price caps have been disastrous for small-scale shopkeepers and politically costly mainly in rural areas. However, the impact of that measure will have to be a material increase in food prices.
All this sounds nice and easy so far, but something will have to end up on the losing side as well. We still expect the loser to be GDP growth this year. Already in H2 2022, the economy slid into recession, although one quite shallow so far, mainly as industrial output is holding up very well. However, the latter is insufficient to provide full compensation for the setback of consumer demand, which is driven by decreasing real wages. This problem may ease in H2, as inflation moderates, but H1 will most likely look like a genuine recession period, and GDP growth is likely to end up being negative for the year as a whole as well.
And this leads us over to central bank policy. Recent communication from the MNB suggested that monetary loosening is excluded in Q1. But from Q2, or more accurately, from the next inflation report in late March, the timing of the first loosening step will likely depend on when decision-makers, including the prime minister, start to feel that the current high sterilization rate and the strong forint could push the economy into a deeper recession. Until recently, we had been betting on loosening to start in Q3 only, but the current trend of events seems to point to that event's possibly coming even earlier.
One area where we have not changed our negative view at all is the prospective availability of new EU development funds. The government is carefully maintaining the flow of constructive talks with the EU Commission, not least in view of the recent negative rating steps by S&P and Fitch Ratings, but it is far from meeting the EU’s conditions in a manner that the Commission would find satisfactory. One reason is that with the prospects of improvements in the budget and the BOP, obtaining the funds in question does not appear to be extremely urgent. So, even though the government has been making important concessions from time to time, its tactic resembles more an organized retreat than just throwing in the towel and doing what the EU requires.
In domestic politics, the Fidesz government has gotten into an open conflict with doctors lately, over a planned reform in the health care sector. Its earlier conflict with teachers has not been resolved, yet some calm has followed an earlier period of noisy demonstrations by the staff and students of public education. Further problems at present are the recent exclusion of Hungary’s public trust universities and research institutes from two key EU programs, and increasing public opposition to the opening of new electric battery production factories, the new favorite of the government, in the country’s second largest city, a politically sensitive location.
All these conflicts are clearly non-critical in short term, but the accumulation of similar issues could become a real problem for Fidesz by the time of the local government and European Parliament elections of next year. On the leftist-liberal-centrist opposition side, the main parties, especially DK and Momentum, appear to be going through some noisy qualifiers among one another, before potentially forming some sort of an alliance for next year’s votes, a must if they want to win against Fidesz. These parties do not have much influence on the current conduct of government policy, in some part because trade unions (teachers, doctors, etc.) also seem to be keeping their distance from them in the management of their own conflicts with the government.
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