More of the Same Expected From Economic Analysts in 2019

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Analysts were cautious in late 2017 with their 2018 outlooks, but all proved wrong: the Hungarian economy surpassed all their expectations last year. Among the reasons were strong domestic consumption and higher-than-average EU-money inflow, but will these be enough to propel further growth in 2019?

“Everyone was pessimistic; all estimates fell short [of the actual figures],” said Éva Palócz, CEO of Kopint-Tárki Institute for Economic Research at the Forecasters’ Forum organized by Hungarian Economic Association in early December, where the heads of the leading research institutes discussed the 2019 economic outlook.

Except for 2016, when the inflow of EU funds stalled when there was a lag between two EU seven-year budget cycles, in the past five or six years, no forecaster has been able to accurately determine the following year’s growth. All underestimated it, even the most exact ones, Palócz said.

Turning to this past year, Palócz said that estimates ranged from 2% to 4%, with 4% being the extreme. As the year passed, estimates were raised as the analysts became more optimistic. In October, the median forecast stood at 4.3%.

It may come as no surprise that the two main drivers of this growth were EU-funded investment projects and growth in trade and consumption. This latter is the result of minimum wage increase and the labor shortage. That growth would be so robust was not expected, Palócz said.

On the production side, industrial performance was quite weak, but since the main pillar of the economy is services, the effect of this was not that significant, the expert said. Construction has grown robustly, although its 5-6% growth has been somewhat curbed by labor shortage, she added.

“Before it turns worse, it will turn better was our assumption,” said András Vértes, chairman of GKI Economic Research. “That is, we expected strong growth for 2017 and 2018 – even if our figures also turned out to be lower than the actual growth.”

Éva Palócz

Hungarian Innovation

The excess created is [in part] of the result of a Hungarian innovation; the Hungarian government has paid much of the EU money from non-EU funds. As a result, roughly 60% of the EU funds of the current budget period will have been paid in Hungary by the end of 2018, he explained. By way of comparison, in other member states this ratio is 20-25%, he added. This has been key to propel growth. Also, it has been an election year, which also has its advantages taxwise, etc. It remains to be seen how this will affect the coming period, Vértes noted

Despite its growth estimates being at the upper end of the scale, Gergely Tardos, chief economist of OTP Bank said his organization was also pleasantly surprised at the rate of growth: it put growth in 2017 and 2018 at 4%.

“The economy has entered a mature stage where, unless there is strong external pressure, it is propelled by domestic demand and delayed investments,” he said. On a less positive note, OTP expected lower inflation rates.

The Hungarian government has indeed paid a lot of EU-money in advance both to the public and the private sector but, as long as it is not used, it won’t strengthen or add to GDP, Palócz said.

The 2019 growth rate could match that of this year and might even exceed it, according to Palócz.

“Growth may exceed 4% [in 2019] too, driven by the same factors as this year: investments and increased consumption.” The major risk is the base: “Can this growth be increased by another 4%-5%?” Palócz asked. In the longer run, a slowdown will definitely come, the effects of which may be healthy for the economy, but not for companies lacking in efficiency, which will need to shut down as a result.

With the minimum wage rate being high, Kopint-Tárki doesn’t foresee any substantial wage increases in the future. Yet, domestic consumption will likely continue to grow in part as a result of delayed consumption, but also because there is now some momentum behind it, and people have started spend more freely not worrying about a potential real wage slowdown (which will also come eventually), Palócz explained.

Slowing Growth

GKI expects growth to slow to 3.2-3.5% this in 2019. There are multiple reasons behind this, from global slowdown to increased external, and European risks – the EU will be preoccupied with elections and Brexit – that will affect the economy, Vértes said. Local government elections taking place will also impact the economy, more than that of the European Parliament. Also, in fields that affect any economy in the long run, such as education or digitalization, no progress has been made.

In the long run, a growth rate 3-3.5% is something any economy would be very happy about, said Gábor Regős, director of the macroeconomics division of Századvég Economic Research. Among the trends that positively impact the economy in the long run, Regős cited employment.

Poor GDP growth in Germany, however, could negatively affect Hungary in the long run, he added. Another external risk could be Brexit, Britain being the second largest foreign trade partner of Hungary in terms of services. Századvég expect wages increases to be above the level of inflation. Investments will continue, though at a slower pace. Taking all this into consideration, Századvég analysts puts 2019’s GDP at 3.5-4%.

OTP estimates growth at 3.8% with upside risks, and a one-percent slowdown compared to the end of this year, Tardos said. Domestic consumption and investment projects will continue to increase, albeit at a slower rate of approximately 0.8-1% compared to last years’ 2%-rate.

Monetary policy will likely remain unchanged and will not affect the economy in 2019; nor will tightening European monetary policy, which will be done gradually, Tardos said. If the European Central Bank raises interest rates, it could force the National Bank of Hungary (MNB) to raise interest rates as well, Regős said. But until then, the MNB can sustain its loose monetary policy.

There aren’t really any factors that might force MNB to raise interest rates, said Tardos. Unlike in the past, there are no foreign currency loans in the household sector and its ratio also been lowered substantially in the state sector; it is concentrated rather in the corporate sector. However, the economy is showing signs of overheating, something MNB should be careful about, Tardos added. The interest rate environment outside Hungary is increasing: that, with a low inflation rate, could eventually prompt MNB to start monetary tightening to smooth cycles, the expert said.

Property prices at Lake Balaton are expected to rise in 2019.

Productivity Issues

In an economy there is hardly anyone on the “average” wage, said Palócz, when asked if current wage raise levels can be sustained in the future. The Hungarian economy is torn between SMEs and large companies with below-average productivity and wages, and foreign owned SMEs and large companies with above-average productivity and salary-levels, said Palócz.

Labor migration continues, so companies need to ensure workforce from an ever smaller pool that, together with increased minimum wage levels, will favor companies with better productivity, she said. Sooner or later, wages increases will be driven by higher-than-average productivity levels but will be curbed by companies’ ability to raise wages. As a result, 2019 will see high-level wage raises, but beyond that the pace will have to slow down.

Calculating with a 3.5% growth rate, a 2% increase in productivity and lower corporate tax rates will result in an approximately 7% nominal wage raise, or a 3% real wage increase, Vértes said. “Large companies will undoubtedly be able to keep up, but SMEs may not.”

The productivity of Hungarian firms has not really increased in the past few years, said Tardos. Companies’ willingness to invest has been lower in a relatively unstable business environment and they weren’t really forced to do so, as there was plenty of low-cost labor. This dynamic is now changing, with productivity levels likely to increase in the future thanks to private sector investments. According to the expert, wage raise levels can be sustained until the next recession.

“Based on recent statistics from 2017, most industries are sound enough and there is room for further increase,” Tardos said. Those mainly smaller companies unable to improve productivity will fold, he added.

Can a lack of skilled workforce curb growth? That is is a question analysts are often asked and it was put at the forum again. It is low productivity that is causing a problem, Palócz said. If the product could be produced by fewer people as is the case, for example, in Austria, there wouldn’t be labor shortage, she said.

The public sector employs far more people than in neighboring states, Vértes added. “Releasing state institutions on the market could be a solution,” he suggested. Or the transition of activities from the public to private sector – already started – must be continued more intensely, he added.

Exchange Rates

Unless something “severe” happens in the region, the euro forint exchange rate will likely remain similar to its rate today and will hover around the HUF 320-325 mark, Palócz said. Real estate prices in the capital and some major cities will continue to increase next year as well, she said.

GKI expects a slightly weaker exchange rate of HUF 325-330 or even higher. Regarding real estate prices, Vértes said that only really good properties in Budapest and near Lake Balaton will see a price increase.

For years, we were spoiled with rates of HUF 310-315, Regős said. Századvég expects the annual exchange rate across 2019 to be similar to the rate in December 2018. Demand for housing will continue to grow, which will increase prices in Budapest and regions with employment opportunities.

OTP’s exchange rate estimate is HUF 325, although that may change with external risks, Tardos said. Real estate prices will continue to increase, though at a slower pace, he added.

Kopint-Tárki estimates for inflation rate is put at above 4%, while the rest of the analysts expect it to be in the range of 3.5-4%, Palócz said.

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