The US Federal Reserve raised its benchmark interest rate by only 25 basis points this time in order to maintain stability in the financial markets, and no further rate hikes are forecast. Despite the banking panic, the ECB raised the base rate by 50 basis points in March, as expected.
Hungarian economic growth expected to reverse trend
International macroeconomic events in March were dominated by the failures of the US Signature Bank and Silicon Valley Bank. The problem lies mainly in the weaknesses in risk management and the banks’ business models.
The March 2023 forecast of the SZIGMA LEAD indicator, which expresses expectations for the Hungarian economy’s future performance in the short term, projects that at the end of the short-term (9-month) forecast horizon, the Hungarian economy will grow slightly above its historical trend.
The high inflation environment forced central banks to raise interest rates. Currently, Hungary has the highest effective interest rate (overnight (O/N) deposit rate: 18.0%) in the region, following the October move by the Hungarian central bank.
In an environment of higher interest rates and higher inflation, the trend towards a preference for premium Hungarian government bonds with above-inflation yields over those with fixed yields continued.
We have revised our growth expectations downwards
Hungarian economic output grew by 4.6% in 2022, while we estimate that it will expand by 0.6% in 2023 and 3.4% in 2024. We have revised down our growth expectations since our previous forecast in December 2022. Downside risks include declining retail sales, uncertainties around EU funding and falling investment due to high interest rates.
The SZIGMA indicator system
The SZIGMA (abbreviation of the Hungarian name “Századvég Index a Gazdasági Momentum Alakulásáról”, in English: Századvég Index of the Development of Economic Momentum) is a simultaneous and preliminary indicator system developed by Századvég for the Hungarian economy.
It is crucial for economic policymakers and analysts to have an accurate picture of the state of the economy, but statistical data are often available with considerable delays. In contrast, the SZIGMA indicators provide information on the economic cycle and the business cycle within 30 days of the reference month, on a monthly basis.
The indicator system consists of two indicators, the SIGMA CI, which summarises the current state of the economy, i.e. information extracted from simultaneous variables, and the SIGMA LEAD, which provides preliminary information on the expected economic trajectory. A positive CI index means that economic growth is above the historical trend, and a negative CI index means that growth is below the historical trend. The SIGMA LEAD indicator provides a short-term forecast for a 9-month period. If the SIGMA LEAD indicator is positive, growth is expected to be above trend in 9 months' time (i.e. three quarters of a year later), while if it is negative, growth is expected to be below trend in the near future.