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Election Outcome Ensures Continuity in Economic Policy

Markets have welcomed the political continuity brought by the landslide victory of Hungary’s Fidesz-KDNP coalition on April 8, analysts say unanimously. Some warn, however, that loosening fiscal policy further – as promised by the prime minister in the election campaign – might be problematic in the longer run.

The victory of the ruling coalition in the Hungarian legislative elections will ensure economic policy continuity, said Fitch Ratings in a press release following the announcement of the result.  
Fidesz did not publish a specific manifesto policy program ahead of the elections, Fitch wrote, instead it highlighed its record in government since 2010. Fitch therefore expects economic policy continuity, with accommodative fiscal policies in 2018 likely to support the strong cyclical position of the economy.  
“We forecast growth to remain around 4% this year, partly due to another minimum wage increase,” analysts at the rating institution said. 

Limited Volatility

Erste group analysts also noted that election results had caused no great swings on the money markets. “In Hungary, the election outcome might induce some limited market volatility in the short-run, but no major movements are expected either in FX or HGB market,” Erste wrote in a note one day after the election.  
Others highlight several risk factors though. Fidesz-KDNP’s sweeping victory might have been welcomed by local financial markets, but the late stage of the economic cycle means the government’s next term is likely to be characterized by higher inflation and slower growth than the last, Emerging Europe economist Liam Carson said in a note after April 8.  
According to him, local financial markets reacted positively to the result. The equity market was up by almost 2% on the morning after election day, and the forint appreciated slightly against the euro. Investors seem to have been reassured by the political stability that the election result has brought, Carson explained, adding that the fragmented nature of the opposition means that if Fidesz-KDNP hadn’t won a majority, then the resulting coalition talks could have been messy.
The Emerging Europe economist warns that the vote has put the spotlight back onto the erosion of institutional quality under the government’s rule, and he thinks this is something to be concerned about. According to him, this might endanger foreign investment activity in an economy that already has a very low investment rate. What is perceived as the erosion of institutions might also have an economic impact via the pullback of EU structural fund inflows.  
Emerging Europe recalls that loose fiscal policy meant that the past few years have been characterized by subdued inflation and strong GDP growth, which had allowed the central bank to lower interest rates to historic lows. 

Capacity Constraints

However, after years of rapid economic growth, capacity constraints are starting to mount, Carson warned. He mentioned that labor market shortages seem to be particularly acute and wage growth had jumped. Therefore, although inflation has been soft in recent months, it is likely to rise over the course of the coming parliamentary term, Carson warned. Growth is likely to be constrained by Hungary’s potential GDP growth rate, which is around 2-2.5%. In this respect, the direction of policymaking is concerning, Emerging Europe’s note states.  
Carson also reminded readers that Prime Minister Viktor Orbán promised to further loosen fiscal policy, mainly through further cuts in the personal income tax rate. Such tax cuts are likely to cause the budget deficit to tip over the 3% of GDP threshold, which might result in further disputes with the EU.
He also warns that there is a growing risk that monetary policy is being kept too loose for too long.
Overly-accommodative fiscal and monetary policy could cause imbalances to build, inflation could rise further, the current account surplus is likely to swing to a deficit, the forint would come under pressure, and asset bubbles could develop, Carson summarized.
Fitch, however, thinks that while tax cuts might indeed cause a bigger deficit in the budget, the government will be able to keep the general government headline deficit below the EU criterion of 3% of GDP. 

Numbers to watch in the coming weeks

The Central Statistical Office (KSH) will detail how much money Hungarians earned in January and February today (April 20). Four days later, second estimates of February retail trade data will follow. Employment and unemployment statistics for the January-March period will come out on April 27. Retail trade figures for March will be published on May 4.