Raiffeisen Hungary sees steady GDP growth

Zoltán Török, senior research analyst at Raiffeisen Bank’s Hungarian unit.

Rising wages should help drive strong consumer spending, which will keep GDP growth in Hungary at more than 2% for the next couple of years, according to analysts for Raiffeisen Bank in Hungary. Speaking at a July 19 press conference in Budapest that was billed as a look at the economic impact of Brexit, the analysts had a lot to say about local factors as they discussed the current state of Hungary’s economy and shared their forecast for the next few years.

Although Hungary faces severe challenges in the area of labor availability, this should not slow GDP growth in the near future, according to Zoltán Török, the senior research analyst at Raiffeisen Bank’s Hungarian unit. He said Hungary’s weak economic growth in the first quarter of the year seems to be a temporary set-back, caused by two factors: the reduced production of one car maker and limited EU funds flowing into the construction industry.

Török said he expected GDP growth to get back on track in the second quarter, and projected a 2.3% rise in GDP for this year, and growth of 2.7% in 2017, adding that this growth will be supported by the increase in private household spending. He said that wage increases as well as income tax reductions should help to promote this growth, and that he expected 2.8% GDP growth in Hungary in 2018.

According to Török, growth will continue in the following year, but the pace will finally cool, and he expects GDP growth to drop below 2% in 2019.

Labor and wage concerns

Despite these rosy predictions, Török noted challenges facing the Hungarian market, including the increasing scarcity of labor. He said there is no reassuring solution for this pressing problem. Most of the participants in the government’s workfare schemes cannot be transferred into the private sector, especially in the areas of skilled labor where workers are needed. Efforts to encourage Hungarians working abroad to return have had only limited success, and the economy cannot really count on migrant workers from outside of the European Union, he said. Economically inactive persons could be the greatest labor resource for the economy, but their qualifications/skills, their residence outside of economic centers or their state of health make it hard for them to join the labor market, Török noted.

The shortage of workers is putting upward pressure on wages, which can help provide equilibrium to the labor market, but according to Török, not all companies will benefit. He said that large, innovative companies can easily ensure higher wages for their employees, and the public sector can also benefit from paying more for the best workers. For smaller businesses, however, the solution may not be so easy. Török said that increasing salary costs could make smaller firms less competitive. He added that a large proportion of SMEs in the Hungarian market fall into this category, and they will be hurt by the need to pay workers more.

Eurozone: In or out?

According to another Raiffeisen Bank analyst, Gergely Pállfy, the euro area is also primed for growth in the coming years. Last year the overall eurozone economy grew at an estimated 1.7%, mostly driven by the region’s household spending. Moreover, the increasing number of people in employment and increasing real wages support the economic growth of the area, he said. While investments and exports fueled some of the eurozone growth in the second half of last year, Pállfy said that household spending remained the main pillar of economic growth in the period.

Pállfy added that the low inflationary environment of the eurozone triggers a growing volume of loans both to households and to enterprises.

Due to the very low interest rate environment, a significant amount of capital is flowing into the peripheral countries of the European Union including Hungary. The Raiffeisen analysts forecast a low interest rate environment in the longer run, so this trend could continue.

In mid-July, Minister for National Economy Mihály Varga brought up the idea of Hungary joining the eurozone by 2020, and then shortly after played down the discussion, noting that the country would have to be ready for the move before it happened.

Török said no argument could be put forward against Hungary’s eurozone membership, and noted that there was more than 50% support for adopting the European currency among Hungarians. Still, he said, some questions need to be answered, including whether Hungary still needs the flexibility of controlling its own currency, and whether the European Central Bank’s interest rate policy would be beneficial for the Hungarian economy.