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EC raises GDP growth projection to 2.1% for 2014, ‘15

MNB

The European Commission (EC) raised its projection for GDP growth in Hungary this year to 2.1% in a forecast released today. The projection in the winter economic forecast was raised from 1.8% in the EC’s autumn forecast published in November. The new projection is slightly over the government’s forecast for 2.0% growth.

The EC put GDP growth in 2015 at 2.1% as well.

The EC said growth would be supported by a further pickup in domestic demand as net exports have a neutral effect, while household consumption is expected to start growing again from 2014 because of higher real disposable income lifted by regulated price cuts, public sector wage rises and looser lending conditions.

The forecast projects private consumption will grow 1.5% in 2014 and 1.6% in 2015. Public consumption is set to rise 1.5% and 2.0% in 2014 and 2015, respectively.

The EC further assessed that a high absorption of European Union funds would contribute to an increase in investment activity as well as a slight growth in net borrowing by companies, and noted a possible tightening of global monetary conditions as well as the domestic adoption of a new relief scheme for borrowers with foreign currency-denominated loans as downside risks to the GDP forecast. A bigger-than-expected effect of stimulus measures on investment present an upside risk to the forecast, the ‘Commission added.

The EC said the general government deficit likely reached 2.4% of GDP last year, lowering its projection from 2.9% in the autumn forecast. But it said the deficit would rise to 3.0% in 2014, a hair over the 2.9% government target. It projected a tax revenue shortfall equivalent to 0.3% of GDP because of lower-than-expected inflation and a more cautious assessment of measures aimed to improve tax administration. It noted the forecast assumed a special fiscal reserve equivalent to 0.3% of GDP would not be spent. The 2015 deficit is set to fall to 2.9% of GDP, according to the winter forecast.

Changes to the method for calculating national co-financing represents a positive risk to the 2014 deficit, but a further slowdown in inflation and an increase in government securities yields could raise the deficit, according to the EC.

The EC forecast Hungary’s state debt as a proportion of GDP would rise from 77.8% in 2013 to 79.1% in 2014, then fall to 78.9% in 2015. All three projections were still lower than the ones in the autumn forecast: 80.7% for 2013, 79.9% for 2014 and 79.4% for 2015.

The EC noted that the two-percentage point drop in state debt from 2012 to 2013 was entirely the result of a year-end reduction of state cash deposits and said the level would rise because of the revaluation of FX state debt.

Preliminary National Bank of Hungary (MNB) data show state debt reached 79.0% of GDP at the end of 2013.

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