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Growth Accelerates in 2017, Paired with Higher Inflation

This year will bring faster economic growth, a bigger deficit and higher inflation to Hungary, analysts and government sources broadly agree.

As usual, most analysts and various government bodies project different trajectories for the Hungarian economy for 2017, with the National Economy Ministry (NGM) seeing the rosiest future for the country. In its updated forecast released at the end of December last year, it emphasizes the fact that the six-year minimum wage agreement will have a material impact on Hungary’s macroeconomic trends in the coming years, resulting in higher growth. While for 2016, the ministry projected a rather conservative 2.1% growth rate, revising it down from its earlier forecast of 2.5%, for this year and the next its figures show a great deal of optimism. In 2017, economic growth in Hungary will pick up to 4.1%, it says, and will further accelerate to 4.3% in 2018. From there it would gradually slow to 3.8% in 2019 and to 3.7% in 2020, the ministry says. In preparing its projections, the ministry calculated with a 9% corporate tax rate and unchanged revenue from the extraordinary bank levy from 2017 through to 2020. 

The National Bank of Hungary (MNB) was more optimistic than the ministry regarding 2016 GDP growth, putting it at 2.8% in its latest Inflation Report, unchanged from the previous report released three months earlier. In the latest document, published last December, the MNB raised it growth forecasts for both this year and next. For 2017, it predicts 3.6% growth, raised from the 3% foreseen three months earlier, and puts the 2018 growth rate at 3.7%.

MNB Governor György Matolcsy expressed an even more optimistic view at a parliamentary committee hearing early December. He said that the country’s economic growth could speed up by as much as 4% in 2017. While some said such expectations are ungrounded and unrealistically optimistic, online economic site said the governor’s forecast is not at all groundless. Construction, industrial output, domestic consumption and foreign investment are all set to increase this year, some from a very low basis. All of the above, paired with higher public spending and infrastructural development could make the faster GDP growth predicted by Matolcsy possible. However, it will depend on external and internal factors, too, the site warns. The higher growth rate is only possible if this year does not bring a global economic recession and agricultural output in Hungary, like 2016, remains high.

Higher inflation

Although the consumer price index fell into negative territory several times in 2016, it started to liven up in the fall, mainly due to rising oil prices. For the whole year of 2016, projections unanimously set inflation at 0.4%. However, with global food and oil prices expected to rise further this year, 2017 will see higher inflation. As both external and internal factors – such as the minimum wage raise – will affect the index, international analysts have revised their inflation forecasts recently.

According to London-based analysts with Bank of America-Merrill Lynch, the consumer price index in Hungary will be 2.6%, 0.2 percentage points higher than in its previous forecast. It also predicts that the country’s economic growth will probably be below the government’s and the central bank’s expectations, and will come to around 2.5%.

At the same time, Morgan Stanley raised its GDP projections for 2017 from the previous 2.5% to 2.9%. J.P. Morgan analysts also expect a 2.9% GDP growth this year, with the inflation rate getting close to the 3% medium-term target of the MNB by the first quarter of 2018. All analysts agree that the MNB has room for monetary loosening, but say that it will deploy non-conventional tools.

Medium-term target

Hungary’s central bank also raised its 2017 inflation forecast last December, estimating next year’s annual average inflation rate at 2.4%, up from the 2.3% rate it projected in September. For 2018, the bank expects inflation of 3%, which is its medium-term target. The MNB, like the London-based analysts, also now expects the rate to reach that target early in 2018, instead of mid-year, as it predicted a few months earlier.

The National Economy Ministry projects the inflation rate will accelerate to 1.6% next year before rising to 3.1% in 2018. Also according to the ministry, last year’s EU-conforming budget deficit is forecast at between 2.1% and 2.3% of GDP, below the original 2.4% target, but above the recently revised 1.7%-of-GDP target announced last November. The NGM said the deficit ratio would rise to 2.4% in 2017 from where it would gradually fall to 1.2% by 2020.

The three leading international credit rating agencies will review Hungary’s debt rating a combined total of seven times in 2017. First, on February 24, Standard & Poor’s will publish its review, and then do so again in August. Fitch Ratings’ review dates are May 12 and November 10, while Moody’s Investors Services scheduled its investigations for March 3, July 7 and October 20. However, that doesn’t mean that any of the rating agencies will actually change their debt ratings for the country. Currently Hungary has a stable outlook with all three institutions, so, with 2016 being a year of upgrades, 2017 could easily be a year of improving outlooks.