Are you sure?

Better Yet is Still to Come

Hungary’s economic growth came to a calendar and working day-adjusted figure of just 1.8% for the past year, the poorest performance since 2012. Growth is expected to speed up this year and next, with some even suggesting a more than 4% increase in 2018.

Following poor full-year data for the Hungarian industrial sector, the Central Statistical Office (KSH) shed light on the whole country’s economic performance. With industry having advanced by the not exactly titanic amount of 0.9% in 2016, the full year GDP growth came to an unadjusted 2%, a little below expectations, while the calendar and working day-adjusted figure came to 1.8%. 


Hungary’s economic growth slowed to an annual 1.6% in the fourth quarter of 2016, down from 2.2% year-on-year in Q3, the preliminary unadjusted data revealed, while analysts’ expectation was 2.1% for the period. Compared to the previous quarter, Hungarian economy grew by just 0.4% in Q4 2016.

Last year’s performance was, therefore, the worst in the past four years: Calendar-adjusted growth was only 1.8% for the full year, following 3.1% and 3.9% in 2015 and 2014, respectively. Considering its poor performance in 2016, industry couldn’t contribute noticeably to the GDP. Even worse, the construction sector declined by 18.8% last year from 2015, throwing back growth quite significantly. Although services and agriculture contributed positively to economic performance, these two sectors weren’t able to compensate for the underperformances elsewhere. A slower inflow of European Union funds also curbed growth. Due to this, there was a 12.7% drop in investment in the first three-quarters of the year, and this also hindered growth. Domestic consumption, however, was a driving force behind the economic performance. 

The Ministry for National Economy (NGM), while acknowledging that last year’s growth was slower than that of 2015, said that the decline could be attributed to the cyclical nature of the absorption of European Union funding. It emphasized that Hungary’s external and internal balances continued to improve in 2016, as there was a record EUR 10 billion trade surplus, and the budget deficit was well under the threshold of 3% of GDP. “The recently concluded six-year wage agreement is expected to result in faster economic growth through boosting competitiveness and demand,” the NGM wrote on its website. The ministry maintains its earlier forecast for GDP growth at 4.1% this year and 4.3% in 2018.

Analysts Optimistic 

Analysts are also optimistic. “ING expects a more favorable growth rate this year, further driven by a rise in consumption and supported by growth in investments,” said ING analyst Péter Virovácz in a note. Takarékbank analyst Gergely Suppan said this year’s output could grow by 3.6%, lifted by base effects and a further increase in household consumption supported by wage increases. He put next year’s growth rate at around 4%.

The European Commission, in its 2017 winter report, updated its economic forecast for Hungary, signaling high private consumption and rebounding investment for this year. According to EC projections, Hungary’s GDP growth is expected to reach 3.5% in 2017 and 3.2% in 2018. It is worth noting, however, that the EC report was released a day before the KSH published its Q4 GDP data.

The government noted that the raw figures growth rate for the full year of 2% is above the EU average, and claims that Hungary has continued to narrow the economic gap with the EU, however, it is also worth taking a look at the GDP figures of the neighboring countries. The EU’s statistical body Eurostat made preliminary GDP data available for 20 EU Member States out of the 28 on February 14, the same day that KSH published its Hungarian GDP figures. Collectively, these reveal that in that comparison, Hungary’s quarterly performance was below the EU average (whether looking at it on a quarterly basis and yearly). This is especially true when compared to the regional neighbors: Romania, Bulgaria, Poland, and Slovakia all produced higher growth at the end of 2016 than Hungary. Romania actually made it to the top of the EU list with its 4.8% increase in Q4 from the same period of 2015.

Inflation Indicator 

At the same time, KSH also released Hungary’s inflation indicator for January. The consumer price index was up by 2.3% on a yearly basis, with the highest price rises being observed among motor fuels and other goods, as well as alcoholic beverages and tobacco. This figure also surprised analysts who expected an approximately 2% rise in the annual inflation rate. According to the European Commission, domestic demand is projected to push inflation up significantly in 2017, to 2.4%. In 2018, inflation is expected to reach and possibly even overshoot the 3% target of the National Bank of Hungary (MNB). Nomura analyst Peter Attard Montalto, who has long said that the MNB’s true target is 4%, which is the top end of the band, agrees with this assessment.

“We think this view will remain the case but we look for a shift in communications to sustain such loose monetary policy. Our overriding view is that the MNB wants very negative real rates”, Montalto said in a note. “We think the MNB will start communicating a lot more about the stability of long-run inflation below 4% and indeed around the center of target as a key anchor for policy. We also expect it to stress that short-term policy adjustments would do nothing for short-run inflation. It may also start to focus more on core rather than headline [figures].”

Numbers to watch in the coming weeks

Following a period of exciting macro figures, the upcoming weeks will be somewhat quieter. The very same day this issue of the Budapest Business Journal comes out, KSH will reveal the number of construction permits in 2016, which hopefully will project a rosier outlook for the construction sector. Employment and unemployment figures for the November-January period will be published on February 27, followed by the much-awaited data for investment in the fourth quarter of 2016. Another exciting figure will be out on March 7, when we will find out how industry performed in the first month of the year. The second estimate of GDP growth for Q4 and the full figures for 2016 will also come out on March 7, promising no big surprise. February inflation data will be published on the next day. But before all of the above, international ratings agencies will start their reviews planned for this year. First up will be Standard & Poor’s, which will publish its results on February 24.