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MNB: Weak external demand, lower EU transfers drag on growth

Analysis

Image by Jessica Fejos

Hungaryʼs economic growth is set to slow in 2016 due to the last European Union funding cycle coming to an end as well as weak external demand, though a cut in the home construction VAT rate, central bank steps to support growth and a decline in the bank levy could offset external impacts, the National Bank of Hungary (MNB) said in its quarterly Inflation Report released today.

The MNB forecasts Hungaryʼs GDP growth will slow to 2.5% next year from a projected 3.0% in 2015, before accelerating to 3.0% in 2017.

Growth could be increasingly driven by a recovery of domestic demand, supported by higher consumption and private investment, according to the report. Household consumption is expected to continue to increase, helped by improving income developments and "the gradual easing of precautionary motives", the report added.

The MNB forecasts household consumption expenditures will rise to 3.2% next year from a projected 3.0% in 2015, then slow to 2.6% in 2017.

Household investment activity could be boosted – against the backdrop of a low-yield environment – by a rise in real incomes as well as the government decision announced earlier in the week to lower the VAT rate on home construction, the MNB said. However, a drop in EU transfers, following the deadline at the end of this year for take-up of grants from the 2007-2013 funding cycle, is expected to cause a sharp decline in public investments, it added.

The MNB sees investments falling 2.0% next year, following a projected stagnation in 2015. But it forecasts a 3.6% increase for 2017.

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