Are you sure?

Q1 Growth Justifies Goverment’s Ambitious Targets

The Hungarian government has sent its updated Convergence Program to the European Commission. The document contains aspiring numbers regarding the economy’s growth potential for the coming years. First quarter GDP data seems to justify such ambitious plans, at least in the short-term.

Mihály Varga, Minister of Finance, at his appointment hearing in front of the Parliamentary Budget Committee on May 15. Photo: MTI/Zsolt Szigetváry.

The expansion of the Hungarian economy continued through the first quarter of 2018, giving ground for those projecting a 4% or even higher growth rate for the full year. As seasonally and calendar-adjusted Q1 GDP data – released by the Central Statistical Office (KSH) on May 14 – shows, GDP grew by 4.7% on a year-on-year basis, with unadjusted data showing a growth of 4.4%. 

Hungary’s economic growth is robust and stable, the government said in a statement reacting to the KSH release. The data confirms the strong growth potential of the Hungarian economy, the note cites incoming Minister of Finance (his old title of Minister for National Economy having been retired) Mihály Varga as saying. 

The main contributors to the growth were market-based services. Compared to the previous quarter, the volume of gross domestic product grew by 1.2% – according to seasonally and calendar adjusted and reconciled data – in the 1st quarter of 2018.

With both external and internal balance trends favorable, and as growth has not been generated by over-borrowing, the current performance of the economy is sustainable, Varga said, adding that expansion has been broad-based because almost every sector has contributed to overall growth. Varga also said that the number one driver of growth had been the stimulating effect of the six-year wage agreement.

‘Indisputable Sign’ 

He also mentioned the nearly 8% increase in the volume of retail sales in the first quarter of the year, which he called an “indisputable sign” of the stimulating effect of the agreement. Housing construction has also boomed recently, and been another engine of the growth, Varga noted.

Putting the figures into an international context, Hungary’s performance was still impressive in the first three months of the year, he said. A recent Eurostat flash report shows that GDP grew on average by just 2.4% across the member states in the first quarter, and thus Hungary’s much faster growth is helping it close the economic gap with the more developed countries of the EU, the minister opined. 

TakarékBank analyst Gergely Suppan said the performance of the Hungarian economy in the coming quarters could be boosted by a wave of home and office building completions, EU-supported investments and strong consumption. Thus, TakarékBank is raising its forecast for full-year growth from 4.5% to 4.6%.

According to ING Bank chief analyst Péter Virovácz, wage increases may well have contributed to the strong Q1 growth. He also expects that new industrial capacity will boost growth in the coming quarters. ING Bank has also raised its forecast for 2018; it now thinks GDP growth will reach 4%.

Nonetheless, the latest GDP figures do seem to be giving ground for the ambitious growth expectations of the government. The country’s fresh Convergence Program, sent to the European Commission at the beginning of May, states that Hungary’s GDP growth will stay at around 4% in the coming years. 

New Projections

The program puts GDP growth at 4.1% in 2019, 4% in 2020, 4.2% in 2021, and 4.1% in 2022. The projections for 2019-2021 are between 0.3 and 0.6 of a percentage point above those featured in the previous year’s convergence program.

The program also relies on strong – albeit slightly declining –household consumption, forecasting a massive 4.8% growth rate in 2019, 4.7% in 2020, 4.6% in 2021, and 4.5% in 2022.

As for budget deficit, the government says that Hungary’s general government deficit, as a percentage of GDP, will be narrowing to 1.8% in 2019, 1.5% in 2020, 1.2% in 2021, and just 0.5% in 2022.

Only a day before the Hungarian government submitted the program to the European Commission, the latter issued its regular economic forecast. For Hungary, the commission raised its projection for GDP growth this year to 4%, up from a projection of 3.7% released in February. The EC put 2019 GDP growth at 3.2%, also up by 0.1 of a percentage point from its previous forecast. The official Hungarian government forecast for GDP growth for 2018 is 4.3%.

The EC is not as optimistic regarding consumption as the Hungarian government: according to the commission, household income and consumption growth are likely to remain strong in 2018, but are expected to slow down in 2019 as the impact of past administrative wage increases fades. Private consumption could rise by 4.9% in 2018 and 3.3% in 2019. Also, capacity constraints in the construction sector may limit the further expansion of residential investment, the report says.

In 2017, the combined gross domestic product (GDP) of the European Union amounted to some EUR 15.3 trillion at current prices. Over half of this was generated by three Member States: Germany, the United Kingdom, and France. At the other end of the scale, 11 member states had a GDP of less than 1% of the EU total. These were Malta, Cyprus, Estonia, Latvia, Lithuania, Slovenia, Croatia, Bulgaria, Luxembourg, Slovakia and Hungary, the latter’s 0.8% share being the highest among them.

Numbers to watch in the coming weeks

Detailed information on the structure of GDP growth will be published by the KSH together with a second estimate of the quarterly growth figure on June 5. Investment volume will be released by the KSH on May 30, regarding the first three months of the year.