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Growth projections revised downward

Three is not the magic number any longer, as several think-tanks have recently projected that the country’s GDP growth will be below 3% next year. The extent of the slowdown varies from research institute to research institute.

György Matolcsy, president of the Hungarian National Bank (MNB) addresses a conference on banking in Central and Eastern Europe held at the MNB September 30. While the MNB is lowering it’s growth predictions, it remains more optimistic than others.

The Hungarian economy will slow down next year – that is the common ground among the analysts who have published forecasts recently. While all of them modified their growth projections downwards, some have been less pessimistic than others. But all agree that domestic consumption and exports will continue to drive the economy.

Not surprisingly, the most optimistic scenario came from the National Bank of Hungary (MNB), which foresees some 3.2% growth for this year and 2.5% for the next. The government-friendly research institute Századvég thinks that while this year’s growth could reach 3%, it will fall back to 2.5% in 2016. Another think-tank, Pénzügykutató, puts the figures at 2.9% and 2.4%, respectively. GKI is even less optimistic: In its latest prognosis, it foresees growth of 2.7% for this year, and 2% for 2016.

These various predictions of slower growth are backed up by the latest GDP figures: After last year’s dynamic 3.6% growth rate, there was only 3.5% GDP growth registered in the first quarter of this year and 2.7% in the second. Overall, this slow-down can mainly be attributed to the agrarian sector, as last year was an exceptionally fruitful one for farming, while this year has seen more extreme weather conditions.

Low inflation also seen

In addition to the poorer performance of the agrarian sector, the closure of the previous European Union funding period and the slow pick-up of the new cycle will also influence the country’s growth potential, said Századvég in its report. According to the research institute, Hungary’s economic performance will be driven primarily by consumption and exports. Purchasing power could improve considerably due to the low inflation environment and improving labor market conditions, as well as the reduction of the personal income tax rate and the extension of the family tax benefit, Századvég said. Unemployment is seen falling to below 6% by the end of 2016. Investments could decline in 2016 due to the closure of the previous EU financing period, the think-tank said. The government’s deficit target of 2.4% of GDP is achievable, it added.

The MNB also lowered its forecast for GDP growth this year by 0.1 percentage points to 3.2%; however, its projection for 2016 GDP growth remained at 2.5%. The central bank also lowered its inflation forecast for 2015 to zero from 0.3% in its fresh quarterly Inflation Report, while the projection for the 2016 consumer price index was lowered to 1.9% from 2.4%. Like the think-tanks, MNB also believes that domestic demand is likely to make an increasing contribution to economic growth as rising exports, improvements in the labor market, a low inflation environment and the conversion of FX loans also support growth.

The gloomiest prediction, as usual, comes from GKI: It predicts investments to fall back by 5% next year, mainly because of the termination of EU-funded projects as well as some investments in the automotive industry. According to the think-tank, economic prospects are further dimmed by a slow-down in the Chinese economy and the expected set back in European business activity (due to rising political risks mainly stemming from the current migration crisis). GKI adds that the consequences of the government’s economic policies in the past years can increasingly be felt in Hungary. It mentions that capital and labor are leaving the country. The research institute emphasizes the increasing risk caused by the disorganization of the European Union and the increasing political isolation of Hungary.