EC revises Hungary GDP growth forecast down to 2.1%

Hungaryʼs real GDP growth is expected to slow in 2016 before rebounding in 2017 and 2018, said the European Commission. GDP could grow by 2.6% in 2017, also revised downwards from a 2.8% growth forecast in spring 2016, then by 2.8% in 2018, it added. 

The negative developments regarding investments in the first half of 2016 greatly affect Hungaryʼs annual growth prospects, said the EC, adding that investment is expected to pick up in the second part of the year as EU fund absorption is set to rebound after some quarters of strong decline.

Household consumption is forecast to continue growing, although at a slowing pace, driven by improved consumer confidence, an upturn in bank lending to households and continuing positive labor market trends. As a result, private consumption remains the main contributor to economic growth, said the forecast.

Private consumption could grow by 4.9% this year, by 4% next year, and by 3.6% the year after that, according to the EC. Public consumption should be more stable, rising by 2% in 2016, by 1% in 2017, and then again by 2% in 2018, it added.

Employment growth, which boosted household income growth and private consumption until now, is expected to slow down over the forecast horizon as the economy reaches full employment. The unemployment rate is projected to decrease only marginally. The labor market is starting to get tight, with skill mismatches overall and difficulties in matching both skilled and unskilled workers with growing vacancies, observed the forecast.

Employment could grow by 2.7% this year, followed by 0.6% and 0.8% annual growth in the next two years. The unemployment rate, as a percentage of the total labor force, should drop from 5.1% in 2016 to 4.7% in 2017, then to 4.1% by 2018, the EC added.

Investment is forecast to recover progressively in 2017 and 2018. This is mainly due to increased absorption of EU funds, improving domestic demand prospects, increasing household investment and several large investments planned in the automotive sector. The low interest rate environment and a recovery in corporate bank lending, in particular to SMEs, are also expected to boost investment.

Net exports contributed positively to growth until 2016, but are forecast to start having an adverse effect from 2017, when the pick-up in domestic demand boosts imports, the EC forecast said. Hungaryʼs relative trade performance is set to deteriorate slowly in line with increasing unit labor costs, which should start putting pressure on price competitiveness, it added.

Exports could grow 6.7% this year, slowing to 5.1% in 2017, then picking up again to 6.4% in 2018, said the EC forecast, adding that imports could expand by 6.2%, 6.6% and 7.2% in 2016, 2017 and 2018, respectively.

The inflation forecast of the EC is unchanged from spring. Consumer prices could grow by 0.4% this year, by 2.3% next year, and by 2.7% in 2018, according to fresh data.

In 2016, the general government deficit is projected to decrease further to 1.5% of GDP. Based on the already adopted budget, the deficit is forecast to increase to 2.3% of GDP in 2017. This reflects the phasing out of one-off revenues from land sales, expenditure-increasing measures and rising domestic co-financing needs as EU-funded projects get underway. Based on a no-policy-change assumption, the deficit is forecast to stay at 2.3% of GDP in 2018, said the EC.

The structural balance is estimated to deteriorate significantly, from minus 1.8% of GDP in 2015 to minus 2.6% in 2016, and then further to around minus 3% by 2018. This mirrors a widening positive output gap and the one-off effect linked to land sales in 2016, the forecast noted.

General government gross debt as a percentage of GDP is set to fall from 74.7% last year to 73.4% this year, then to 72.5% in 2017, the EC predicted. Gross debt could be 71.8% of GDP in 2018. In spring 2016, the EC predicted higher debt figures for all four years concerned, but the relatively high rate of nominal GDP growth has pushed these figures lower.