Hungaryʼs growth loses some steam but ‘underlying macro story’ still positive

In its "CEEMEA Economic Autumn Outlook" report released to clients in London, Morgan Stanley said that the Hungarian economy had "less momentum than we anticipated" in the second quarter, therefore "our previous forecasts for 3.5% GDP growth this year and 2.5% next year now look out of reach. [...] We therefore downgrade our GDP forecasts to 2.9% in 2015 and 2.4% in 2016".

However, this somewhat slower than expected growth "does not really change the underlying macro story" as Hungary continues to enjoy a recovery in domestic demand from depressed levels. Fiscal policy is turning expansionary after years of austerity, rates are at record lows and consumers got a large wealth transfer from the banks following the FX loan conversion earlier this year, and face a debt-service burden of sub-8% of disposable income, the lowest in over ten years, Morgan Stanleyʼs analysts said.

On the inflation front, the new oil profile has triggered a downgrade. "We now see CPI at 1.9% (year-on-year) at end-2015 and 2.5% at end-2016. [...] These forecasts are approximately 0.3% lower than we previously had."

In this environment, even keeping policy rates on hold will amount to implicit monetary easing. With inflation set to approach 2% by year-end, Hungarian real policy rates will move firmly into negative territory and stay at around -1% throughout next year, Morgan Stanleyʼs London-based analysts said.