The European Commission raised its projections for Hungary’s GDP in 2013 and 2014 and augured narrower general government deficits in its spring economic forecast published on Friday.
The EC projects Hungary’s economy will expand 0.2% this year in the fresh forecast, compared to a 0.1% contraction in the previous one published in February. Hungary’s government recently lowered its projection for GDP growth this year to 0.7% from 0.9%.
The EC changed its projection for Hungary’s general government deficit to 3.0% of GDP in 2013 and 3.3% in 2014. In the February forecast, it put the gap at 3.4% of GDP in both years. Hungary’s government projects a 2.7% of GDP deficit in both 2013 and 2014, well under the 3% European Union threshold.
Speaking at a press conference in Brussels after the forecast was published, European Commissioner for Economic and Monetary Affairs Olli Rehn said Hungary could exit the Excessive Deficit Procedure the EC launched against the country in 2004, the year it joined the EU, provided it “stays the course”, achieving fiscal sustainability. He said the country’s deficit can remain under the 3% threshold with additional measures.
Rehn grouped Hungary with Italy in terms of the outlook for lifting the EDP. In contrast, he singled out Latvia, Lithuania and Romania as candidates for abrogation of the EDP. The EC said it expected a “mild recovery” in Hungary in 2013.
“Export markets are set to grow and a stabilisation of domestic demand is expected on account of an increase in real disposable income, although the high unemployment rate and the ongoing deleveraging are likely to limit household spending. Private investment growth is projected to remain negative in view of the continued fall in lending and high surtaxes on some capital intensive sectors,” it explained.
The EC changed is projection for private consumption this year to 0.2% from -0.5%. It raised its unemployment rate projections to 11.4% from 11.1%.
The EC said that a decline in private sector employment is expected in early 2013, but overall employment is set to remain “broadly stable”. From 2014, employment is seen starting to increase again, but unemployment could rise slightly as the workforce participating rate grows, it added.
The EC said net exports and domestic demand would drive growth in 2014. Household consumption is set to increase on higher real disposable income and looser lending conditions, while investment growth is expected to be supported by the National Bank of Hungary’s recently announced “Funding for Growth Scheme”, it said. Looser-than-expected financial conditions or a possible better-than-expected rebound of the farm sector could improve the GDP outlook, it added.
The EC said the general government deficit would rise from 1.9% of GDP in 2012 to 3.0% in 2013 as a result of the phasing out of temporary revenue measures equivalent to three-fourths of a percentage point of GDP, stimulus measures equivalent to the same amount and higher interest expenditures adding up to one-fourth of a percentage point of GDP. Corrective measures, mainly higher taxes, are expected to improve the balance by the equivalent of one and three-fourths of a percentage point of GDP, while measures announced in the context of Hungary’s 2011 and 2012 Convergence Programmes are set to narrow the gap by half a percentage point of GDP, it added.
The 2014 deficit projection assumes no change to policy, the EC noted. The deficit is seen rising over the 3% threshold on higher wages for teachers equivalent to more than half a percentage point of GDP, the impact of the government’s Job Protection Plan, equivalent to one-quarter of a percentage point, and the net effect of growing public investment and consumption equivalent to almost half a percentage point.
The EC puts Hungary state debt as a percentage of GDP at 79.7% in 2013 and 78.9% in 2014,
