GKI raises 2019 GDP growth forecast to 4.9%

GKI notes that the nearly 5% growth rate in 2018 and 2019 is one of the fastest in the EU, adding that the rate exceeded all prognoses.

The institute attributes rapid growth to the surge in EU transfers and the previously favorable global economic boom and later the improvement in industrial output and outstanding services exports as well as the measures stimulating domestic demand, including wage agreements and tax cuts. GKI underestimated the investment and export potential of the business sector.

Slowdown coming in 2020

According to the document,  an explicit slowdown can be expected next year, which is likely to continue until 2022. The main reasons for the slowdown are the phasing out of EU transfers, the gradual weakening of the forced increase of wages, the worsening global economic growth, and the modest competitiveness of the Hungarian model.

According to GKI, GDP will grow by 4.9% in 2019 and by 3.2% in 2020, investments by 16% and 5%, and household consumption by 4.5% and 4%, respectively. After its 0.8% growth in 2019, employment will increase only slightly in 2020, by 0.5%.

The unemployment rate will remain around 3.5%, lower than the EU average even when considering those involved in public work schemes as well.

External equilibrium is favorable, Hungary’s external financing capacity is rising from 2% of GDP in 2018 to 2.4%in 2019, and it will drop to 1.7% in 2020 due to rise in the current account deficit and the decrease of EU transfers; however, it will still be favorable, the institute says. 

GKI notes that while the general government deficit and the inflation rate are quite high by European comparison, they remain manageable in the short term.

The envisaged budget deficit of 1.8% of GDP in 2019 may be attained. However, the realization of the targeted 1% in 2020 is uncertain, a rate of about 1.3% seems more likely.

The inflation rate is expected to be 3.2% in 2019, and it will exceed the government’s 2.8% forecast in 2020 as well. GKI expects a rate of 3.3% in 2020. The annual average exchange rate of the forint to the euro was HUF 319 in 2018, it will be HUF 325 in 2019, and HUF 335-HUF 340 in 2020, resulting in around 6% depreciation in the past two years.

Uncertainties grow

GKI argues that maintaining the present economic stimulus policy is risky, as after 2020, when EU transfers will be significantly reduced and the inflation rate may remain high, there might be no fiscal and monetary room for maneuvering to stop a significant slowdown.

According to the institute, the main question is whether a largely government-orchestrated investment boom can lead to any competitive supply of goods, and to what extent the Hungarian government, will be able to promote its interests, for example, when the content of the next seven-year EU budget will be determined.