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Hungarian Economy Takes Leading Position in EU

The Hungarian economy showed a surprisingly strong performance in the first quarter of the year, not only in regional context, but even from an EU perspective. The 5.3% growth rate beat analysts’ expectations; however, a slow-down is expected for the rest of this year and for next.

Having beaten market estimates, the Hungarian economy grew by a robust 5.3% in the first quarter of the year, according to the first reading of the data released by the Central Statistical Office (KSH).  

Seasonal- and calendar-adjusted data shows a 5.2% increase in the first three months of the year, above the consensual market expectations of 5.1%. This makes it the country’s second highest quarter of growth since 1996. Annual growth in Q1 2018 was 4.6%, while for the entire year of 2018 it was 4.9%.

According to KSH, the main contributors to the growth were industry, construction and market-based services. GDP growth in Q1 was mainly boosted by an increase in investments, exports, jobs and wages, Minister of Finance Mihály Varga said in a reaction to the data, reminding that the government currently expects GDP to grow by 4.1% in both 2019 and 2020.  

Varga said that the last time economic growth in the first quarter of a year was similarly large was back in 2000, halfway through Fidesz’ first term in office; however, he also noted that back then government debt was also growing, which is not the case this time.

Analysts were taken by surprise by the data. Gergely Suppan of Takarékbank expects a gradual slow-down in the coming quarters, mainly due to the ascending base effect; however, the annual growth rate might still reach 4.7% this year, and could come to 3.7% in 2020, he said.

External Environment

The better-than-expected figures came out in the midst of a somewhat worsening external environment, Gábor Regős, head of macroeconomics research at Századvég Gazdaságkutató emphasized, referring mainly to the slowing economy of Germany, which is Hungary’s largest export partner.

Based on the first quarter data, he expects that the annual GDP growth will exceed 4% this year, while problems in the EU and in the global economy might pose a risk to the growth.  

According to Orsolya Nyeste of Erste Bank, the main driver of the economic growth is still the strong domestic consumption, which is backed by a tight labor market, and the ever growing wages this year. The bank is likely to raise its GDP forecast for this year based on the first quarter figures, from 3.8% to above 4%.

Following the strong first quarter, the rest of the year might bring slower growth, Dávid Németh, head analyst at K&H Bank said. The contribution of the construction sector will be somewhat lower in the coming months, and the agrarian sector also poses downward risks. All in all, the Hungarian economy might expand by an annual 4-4.5% in 2019, he predicted..  

According to the latest data gathered by Eurostat, the European Union’s statistical body, the growth rate of the Hungarian economy was the best in the block. While economic growth also accelerated in the euro area and the wider EU-28 in Q1 compared to Q4 2018, Hungary’s economy grew at the fastest pace quarterly and annually.  

Pack Leader

Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.2% in the eurozone and by 1.5% in the EU in Q1 2019. Hungary’s economy grew by 1.5% quarter-on-quarter and 5.2% year-on-year. With an annual GDP growth of 5.1%, Romania came second, while, Poland was third with 4.6%. That said, however, the first quarter data for eight countries (Estonia, Ireland, Greece, Croatia, Luxembourg, Malta, Slovenia and Sweden) are not yet available.

In spite of the outstanding performance and the fact that many international organizations have updated their GDP forecasts for Hungary, the OECD has stuck to its forecast of Hungarian economic growth of 3.9% this year. This projection is just below the Hungarian government’s 4% target; as for next year, the OECD says that growth will be 3%.  

According to the organization, private consumption remains strong, helped by rising real incomes and high consumer confidence coupled with supportive macroeconomic policies. Investment growth is “buoyant”, supported by EU funding, housing subsidy schemes and expanding production capacity, it added.

Hungary’s “strong recovery is an opportunity to introduce measures to improve fiscal sustainability, reduce old-age poverty and address access challenges in the pension and health system”, the OECD said.

In a reaction to the report, Gábor Gion, state secretary for financial policy affairs, said the OECD’s forecast confirmed that Hungary was one of the most dynamically growing European Union member states.

Numbers to Watch in the Coming Weeks

The KSH will publish data of the Hungarian labor market on May 29 for the February-April 2019 period. The next day will shed light on the investment figures of the first quarter of 2019, followed by the second estimate of the first quarter GDP figures.