Are you sure?

Economy Grew by 4% Last Year

Hungary’s gross domestic product increased at a pace above analysts’ expectations in the fourth quarter of the last year, while GDP growth for the whole year is estimated at around 4%, which was in accordance with most of the previous forecasts. All the same, S&P left Hungary’s debt rating unchanged in its latest review.

Hungary’s economy expanded by 4.4% on a year-on-year basis in the fourth quarter of 2017, according to a flash estimate of data that exceeded analysts’ expectations. 

The pace of growth accelerated from 3.9% in Q3. In Q4, GDP grew by 4.8% according to seasonally and calendar-adjusted and reconciled data, compared to the corresponding quarter of the previous year.

Compared to the preceding quarter, the volume of GDP grew by 1.3% in Q4, according to seasonally and calendar-adjusted and reconciled data. According to the Central Statistical Office (KSH), the main contributors to growth were market-based services and construction.

As for the full year, the GDP growth was 4%, unadjusted, raw KSH data revealed. The Hungarian government targeted a GDP growth of 4.1% for the past year. 

“These figures are remarkable, even from a historic perspective: this KSH data has been the best since 2005,” Minister for National Economy Mihály Varga commented on the data. In his analysis, Varga pointed out that in 2017 there were three working days less than in 2016, of which two were missed in the last quarter. GDP data which takes this factor into account and is used for EU statistics show an even more favorable picture, he said. According to these, GDP was up by 4.2% last year and by 4.8% in the last quarter.

Economic Drivers

K&H Bank chief analyst Dávid Németh forecast GDP growth could be around 3.8% this year but is likely to slow down somewhat in 2019. According to him, as with the past year, domestic consumption and investments - the latter based on EU funds - will drive economic growth in 2018, and the favorable international environment also supports the expansion of the Hungarian economy.

CIB analyst Sándor Jobbágy told the national news agency MTI that he expects strong GDP data this year too; however, growth could be a little slower than in 2017. In his estimate, he suggests economic growth of 3.5-3.7% for the whole of 2018.

CIB Group said Q4 growth was supported by market-based services to the greatest extent, similar to Q3. The contribution of construction was also strong, although in this case the low base from 2016 played a significant role, given the significant fluctuation of EU funds over the years. Overall GDP growth was broad-based, CIB noted.

Based on monthly figures published earlier, CIB assumes a persistently outstanding role for domestic consumption. In addition to local factors, the role of the European boom is also significant. The growth of the strongest driver, i.e. the German economy, was close to 3% in Q4, while the entire euro area probably showed similar year-on-year growth, which has been outstanding in the period since the economic crisis.

In 2018, it is likely that growth will remain significant, but somewhat less dynamic than in 2017, says CIB. Based on consensus calculations, the average expectation of market players suggests full-year 2018 growth of 3.5-3.7%, the bank adds. It also emphasized that market services contributed the most to the growth in the fourth quarter of last year, while the performance of the construction sector was also noteworthy. 

Available EU Funds

Erste Bank head analyst Orsolya Nyeste said GDP growth could be 3.5% or more this year. As for the main contributors to the growth, she also thinks that it is likely to remain unchanged from last year; namely, driven by domestic consumption and stronger investment activity. She also noted that mid-term outlook is strongly determined by the inflow of available EU funds, the labor market situation and its influence on consumer consumption, and also the sustainability of the current favorable economic environment in Europe. In spite of expectations that were supported by such favorable figures reported by the KSH, ratings agency Standard & Poor’s left Hungary’s debt rating unchanged in its current country review. 

S&P Global Ratings affirmed its ‘BBB-/A-3’ long- and short-term foreign and local currency sovereign credit ratings on Hungary on February 16. The outlook remains “positive”.

In its reasoning, S&P wrote on its website that the positive outlook primarily reflects the possibility that Hungary’s strengthening economic metrics might support ongoing improvements in the banking sector, thereby reinforcing the monetary transmission channel. Although it did acknowledge some risks, it also outlined a scenario that could see it give a further upgrade.

“We could raise the ratings in the next 12-18 months if recent improvements in the financial sector enhanced the authorities’ ability to influence domestic monetary conditions. This would be signaled, for example, by a stronger recovery of bank lending alongside continued economic growth, accompanied by current account surpluses and contained fiscal deficits,” the credit rating agency said.

Although the awaited upgrade did not happen this time, the institution also acknowledged Hungary’s performance. Hungary, like its regional peers, is undergoing a strong cyclical recovery. Therefore S&P expects real GDP growth will approach 3.5% in 2018, only modestly lower than in 2017. This is due to booming consumption, triggered by real wage and employment gains; fiscal stimulus and minimum wage hikes; substantial recovery in EU structural and cohesion fund inflows; rising expenditure on housing subsidies; stronger private-sector balance sheets; and the ongoing recovery in the eurozone. 

In 2017, after a 10-year lapse, real consumption and investment in Hungary recovered to pre-crisis levels, S&P noted.