OECD raises Hungary GDP growth forecasts

The OECD has raised its forecast for this year to 4.6%, up from 4.4% in its previous Economic Outlook released in May. It has also raised the forecast for next yearʼs growth to 3.9%, up from 3.6%.

Hungaryʼs government projects GDP growth of 4.3% in 2018, and 4.1% in 2019.

In a country note, the OECD says economic growth is projected to remain strong but to slow somewhat in 2019 as capacity constraints bite. Real wage gains and employment increases will support private consumption, it adds, while investment will be stimulated by private firms and the disbursement of EU structural funds.

Private consumption is expected to increase by 5.6% this year and by 4.7% next year. Total domestic demand should grow by 5.2% in 2018 then 4.9% in 2019, the OECD says.

Exports will benefit from robust external demand and new capacity expansion, although gains in market share will slow, according to the report. Exports could increase by 8.3% this year, but imports could grow at an even faster rate of 9.6%. Import growth could continue to outstrip export growth in 2019 and 2020 as well.

Inflation set to rise

Wage increases resulting from tighter labor market conditions will raise inflation, which the OECD projects to exceed the central bankʼs 3% target in early 2019, averaging 4% for the year and for 2020.

According to the report, Hungaryʼs overall macroeconomic policy stance and higher statutory minimum wages are adding considerable stimulus, despite clear signs of labor market overheating, and prudent policies are needed to counter this.

The strong upswing represents an opportunity to reduce the number of participants in public work schemes, which, combined with effective training measures, could make additional resources available for the primary labor market, says the OECD. Deregulation and a variety of competitiveness-enhancing measures would contribute to an improved business environment and could bolster productivity growth, it adds.

Only a marginal decline in the general government deficit is projected in 2019, compared with 2017 when it stood at 2% of GDP. Both macroeconomic policy levers should become more restrictive, but this is unlikely to happen until 2019 at the earliest, the report notes, adding that interest rates will need to be increased to sustain low inflation expectations.

Risks are centered on a faster-than-expected pick-up in wages, further eroding cost competitiveness, and unhinging inflation expectations. Hungary also remains vulnerable to any shock to demand for vehicles in its main export market, Germany, the OECD report warns.