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EC puts Hungary 2016 GDP growth at 2.1%

The European Commission projected that Hungaryʼs economy will grow by 2.1% this year and 2.5% next year, as part of its winter economic forecast for all European Union member states released today, Hungarian news agency MTI reported.

The projection for this year was lowered slightly from 2.2% in the previous EC forecast released early last November. The fresh projection is under the governmentʼs official target of 2.5% growth for this year.

Growth this year is set to slow from an estimated 2.7% in 2015 due to a decline in the absorption of EU funding and a slowdown in external demand, the EC said, adding that partial compensation should come from a more than 3% increase in private consumption. Household spending should be boosted by a reduction in the personal income tax rate from 16% to 15% and the effect of an earlier government measure to convert retail FX loans into forints, the EC explained.

The EC said consumption should “remain robust” in 2017, and help drive growth. A reduction in the bank levy and new central bank policies that provide subsidized lending to SMEs should create a “friendlier lending environment”, while a reduction in the VAT rate for home construction gives impetus to the home market, it added.

Throughout the forecast horizon, householdsʼ precautionary savings attitudes are set to decrease, the EC noted.

The forecast puts consumer price inflation at 1.7% in 2016 and 2.5% in 2017. Lower-than-expected oil prices, subdued imported inflation and low food prices are likely to keep CPI under the National Bank of Hungaryʼs 3% mid-term “price stability” target until the end of 2017, according to the forecast.

The EC projects the general government deficit will reach 2.0% of GDP this year, in line with the governmentʼs official target. It sees the gap narrowing to 1.9% next year. This year, lower spending on interest, savings on co-financing for EU-funded projects and “contained” expenditures on social payments and operating costs are expected to counterbalance the impact of tax cuts – amounting to 0.7% of GDP – as well as a new home purchase subsidy scheme, the EC said.

The forecast puts Hungaryʼs state debt as a percentage of GDP on a declining path, which is expected to reach 74.3% at end-2016 and 72.4% at end-2017.