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All eyes on next year’s growth

The latest GDP data  turned out to be better than previously calculated, but this year’s growth will likely reach just 2%. Analysts expect the economy to speed up next year, but industry, which gives a good portion of the GDP, still lags behind.

Hungaryʼs Minister for National Economy Mihály Varga delivering a speech at a ceremony awarding successful businesses in his ministry on December 2. He still has faith the economy will grow strongly next year. (Photo: MTI/Noémi Bruzák)

Hungary’s gross domestic product grew by 1.6% year on year and by 0.3% quarter on quarter in July-September 2016, the Central Statistics Office (KSH) reported on Tuesday. According to the second estimate figures, y.o.y. GDP growth was 0.2 percentage point higher than the preliminary reading.

The detailed release by the KSH reveals the structure of the economy: while the main contributor to growth was agriculture, the services sector, which had been seen as another strong segment, showed some slowdown from Q2, although it was still one of the main drivers. The value added of industry grew by 0.8%, within which the value added of manufacturing rose by 0.7% compared to the same period of the previous year. Within manufacturing it was the growth in the making of computer, electronic and optical products that was the most significant of the sub-sections with relatively large weight. Within industry, the performance of non-industrial activities rose as well, according to KSH.

On the consumption side, the contribution by households was smaller this time, but it remained the strongest fundamental factor. The performance of the construction sector, which has halted growth this year, continued to fall away; it was down by 12% in the third-quarter. Civil engineering fell most within the sector. The value added of agriculture was up by 21%.

All of the above show that the momentum of economic growth did not continue in to October, so the government’s expectations of an approximately 3% growth for this year will probably not be met; what is more, it could even come in below 2%.

Industry and retail have seen better days 

Freshly published industrial output and retail sales figures might also undermine the government growth expectations for this year. The KSH also published its first reading of October’s industrial performance. Figures show that output had declined for the second consecutive month, falling 2.1% from October 2015, after it fell back 3.7% in September, also on a yearly basis.

As Volkswagen AG plans to temporarily reduce shifts at its Audi factory in Győr from three a day down to two, “it might be difficult to reach even an average industrial production expansion of 1.5% this year”, ING economist Péter Virovácz said. Auto production and associated components account for the biggest share of Hungary’s industrial output, representing a 30% stake.

In addition, October retail sales grew at their slowest pace since January. The volume of sales in retail shops, according to both raw and calendar-adjusted data, grew by 2.6% y.o.y. in October 2016. The growth rate is surprisingly low; in fact, it is the lowest we have seen over the last two years, bar this January. Analysts, however, say that consumption could pick up in the coming months, as real wages have risen fast this year, and wage growth will be even more accentuated as a result of the hike to the minimum wage and the reduction of employers’ contributions.

Growth to pick up next year 

The government sees economic expansion picking up speed in 2017. “Growth is expected to be back up with the government’s housing incentives, wage hikes and payroll tax cuts in the next six years and a pick-up in the absorption of EU funds,” the government said in a statement. Analysts agree: Gergely Ürmössy, head analyst at Erste Bank, raised growth projections for next year to 3.4% from the previous 2.8% – while maintaining its 2.1% forecast for this year.

Less optimistic is ING’s Virovácz, who expects 1.8% growth for the fourth-quarter of 2016 and a little below 2% for the full year. However, he emphasized that this is only temporary; next year is likely to see an expansion of above 3%.

Hungary’s economy minister Mihály Varga is even more optimistic: in a recent interview published in weekly Figyelő, he said he expected the country’s gross domestic product to grow by about 4% in 2017. Next year’s budget was passed with a 3.1% growth projection.