MNB projects current account deficits through 2021


Photo by Jessica Fejos

The National Bank of Hungary (MNB) projects the country will run current account deficits through 2021, forecasts in the central bankʼs quarterly Inflation Report released in full on Thursday show, according to a summary by state news agency MTI.

The MNB forecasts current account deficits equivalent to 0.9% of GDP in 2019, 0.7% of GDP in 2020, and 0.4% of GDP in 2021.  

In its previous quarterly forecast, published in June, the central bank had put the current account balance at zero for 2019, and projected surpluses in 2020 and 2021. Hungary had a current account deficit equivalent to 0.5% of GDP in 2018, MTI recalled. 

The MNB acknowledged in the latest report that the current account balance is expected to decline temporarily in 2019 as declining demand on global markets and higher domestic demand cause the trade balance to deteriorate. At the same time, increasing absorption of European Union transfers will give Hungary a net external financing capacity equivalent to 1.8% of GDP, it added.

From 2020, the central bank sees net exports contributing positively to economic growth as the increase in imports slows because of restrained investment growth. In parallel, absorption of EU transfers is likely to decrease slightly as the end of the funding cycle approaches, it added. The MNB put the net external financing capacity at 2.0% of GDP in 2020, and at 1.7% of GDP in 2021.

The MNB noted that a persistently favorable net lending position would reduce net external debt to nearly zero over the forecast horizon.

Base effect to lift CPI until end of year

The central bank said the consumer price index (CPI) is likely to rise again until the end of 2019 because of the base effect of lower fuel prices, then to stabilize at the 3% mid-term inflation target.

Core inflation excluding indirect tax effects is expected to “rise slightly” in the coming months, before decreasing to 3% “along a lower than previously expected path, due to external disinflationary effects,” the MNB added.

As revealed in a preliminary release on Tuesday, the MNB puts average annual inflation for 2019 at 3.3% in the fresh report, 0.1 of a percentage point higher than the forecast in the previous report released in June. The central bank left its forecasts for CPI in 2020 and 2021 unchanged, at 3.4% and 3.3%, respectively.

The central bank noted that GDP growth in 2019 may have peaked in Q1 and augured “a more moderate pace” of growth in the period ahead “in the absence of measures improving competitiveness.” Regardless of this, it added, Hungaryʼs growth rate will remain two percentage points over the growth rate in the eurozone.

The MNB projects GDP growth of 4.5% for this year, up 0.2 of a percentage point over the previous forecast. Hungaryʼs first-half GDP growth was up 5.1% year-on-year. The forecasts for economic growth in 2020 and 2021 are both 3.3%.

The central bank said household consumption growth would gradually diminish as wage growth slows, but it projected a “persistently high” savings-to-income ratio of around 10% in the coming years, supported by the popularity of the Hungarian Government Security Plus (MÁP Plusz) bonds.

Reforms could keep growth around 4%

The MNB acknowledged the positive impact on growth of a 13+1-point Economy Protection Action Plan unveiled by Minister of Finance Mihály Varga in the spring, but also urged policymakers to act on recommendations outlined in the central bankʼs 330-point Competitiveness Program published in February.

The central bank called for improvements to the education level and health status of human capital, as well as the efficiency of the state, and for reductions in bureaucracy and the shadow economy. It added that efforts to achieve innovation, modern infrastructure, efficient energy consumption and social convergence are “indispensable.”

Implementing the MNBʼs competitiveness reforms could result in lower inflation and GDP growth of around 4% over the forecast horizon, the report noted.

Other alternative scenarios the MNB weighed when compiling the report were the possible postponement, by about a year, of big investments by German automotive companies in Hungary, leading to lower investment activity and lower underlying inflation developments. Another scenario assumed persistent double-digit wage increases that would result in a higher inflation path.

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