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Ministry keeps Hungaryʼs GDP growth forecast above 4%

The Hungarian Ministry for National Economy maintained the projection of 4.1% GDP growth in 2017 and a 4.3% increase in 2018 in a statement released on December 27. Meanwhile, the  household consumption spending growth is expected to slow considerably.

"The Hungarian economy will remain on a balanced and sustainable path in the coming years, will expand dynamically, amid a stable budget, dropping state debt and high employment," the ministry said in a statement on its macroecomic and budgetary forecast for 2017-2021, according to national news agency MTI.

Investments are one of the main engines of growth this year, thanks to the home support program, the gradual rise in the use of EU funding, and capacity expansion by big companies, the statement said, noting the effect of the cut of the corporate tax to 9% from the beginning of 2017, linked to last yearʼs six-year wage agreement.

Growth is also supported by growing consumption on the back of rapid wage rises and expanding employment. On the production side, market services contribute the most to growth.

The ministry attributed the steep expansion of the construction sector to rising home building as well as to infrastructural development co-financed by the EU. The accelerating growth of industrial output reflects recently completed capacity expansions, among other things, it said. Labor demands have pushed employment to more than 4.4 million, a new all-time peak, and the unemployment rate to a miserly 4%, the ministry statement said.

Parallel with dynamic growth, inflation has remained moderate and financial equilibrium is favorable, the ministry said, noting that Hungaryʼs country risk had dropped and two of the three big credit rating agencies had changed the countryʼs rating outlook to "positive".

Meanwhile, the economy ministry sizeably lowered its estimate of the pace at which household consumption spending is expected to grow in 2017 and 2018.

The rates for household consumption spending growth were put at 4.5% for 2017 and 4.9% for 2018, down from the respective 6.1% and 5.4% expansion projected in the latest official forecast in Hungaryʼs 2017 convergence plan published in April 2017. The pace will be slightly more than thought last spring for 2019 and 2021, and will remain above 4% throughout the period.

While the ministry did not specify the reason for the above change in the macroeconomic and budget forecast 2017-2021, it also revised down its forecast for employment growth, to 1.6% from 2.5% for 2017 and to 1.3% from 1.8% for 2018. The forecast took note, on the other hand, of the steep jump in gross fixed capital formation or investments.

Investments are now seen likely to have risen by more than 21% in 2017 after a milder than earlier forecast fall in 2016. The jump reflected rising investments by businesses, expanding home construction, helped by the governmentʼs CSOK program, and the accelerated contracting of European Union funding, which pushed state investments up by 80% in nominal terms in H1.

Investments are projected to expand by 12.5% in 2018 and the increase will then slow to 3.7% in 2020 before a pickup again in 2021. From 2019 on, the projected pace is significantly down from the forecasts in the spring conversion plan.

The ministry scaled up both its export and import growth forecasts for this year and next compared to its expectations in the spring. It made the biggest (three percentage point) upward revision, to 9.8% in the pace of 2017 growth of goods and services imports.

Local demand has become more import-intense than previously, the document noted, adding that the growth of goods and services imports significantly exceeds that of exports, as the use of EU funding gathers pace, and the import needs of supplier networks rises as household consumption expands.

Net exports have shifted into the negative as a result this year, and it is projected to stay negative until 2020 according to the fresh forecast. The conversion plan originally projected negative net exports for all five years.