Spectacular expansion of investments continued

The growth rate of the Hungarian economy was noticeably lower in the second quarter of 2017 than in the first one, and it was one of the lowest in the CEE region. However, it still exceeded the EU average. The spectacular expansion of investments continued, and on this basis, GKI raised its GDP forecast for 2017 to 3.8 per cent. The trends are favourable in the short term; however, long-term solutions are still missing.

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Budgetary advance payment of EU transfers increased sharply

In Hungary, the faster than expected GDP growth in the first quarter of 2017 was followed by a slight slowdown in April and a pick-up in May. GDP growth is expected to accelerate to around 3.5 per cent in 2017 from 2 per cent in 2016, primarily as a result of investments rising this year, whereas they declined last year. Although external and internal equilibria will deteriorate slightly in 2017, and inflation will accelerate, these trends are acceptable in the short term.

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Forecast for 2017

The Hungarian economy grew by 4.2 per cent in the first quarter of 2017, by a rate not foreseen by anybody. A growth rate higher than this one has been recorded only once since 2007. This high rate was due in part to the low base. The Hungarian growth rate was much higher than the EU average; however, it was not outstanding in the CEE region. The growth rate in Romania and Slovenia was more than 1 percentage point higher than in Hungary, and the economic growth of Poland and the three Baltic countries was also more dynamic. Data indicate a deterioration in Hungary in April, and the fall in the performance of agriculture will be significant in 2017. The growth rate of consumption is expected to accelerate in 2017, whereas a sharp slowdown in investments can be anticipated. Therefore, GKI raised its growth forecast for 2017 from 3.2 per cent to only 3.5 per cent, although it is possible that the rate will be slightly higher. Although external and internal equilibria will deteriorate slightly, and inflation will accelerate, these trends are acceptable in the short term. It is important for the medium-term course of the Hungarian economy that after the German elections the deepening of the integration of countries willing to work in close cooperation will be on the agenda in the EU. This can push Hungary to the periphery of the EU. At the same time, Hungary will less likely be able to rely on EU transfers of crucial importance.

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Growth faster than expected

In the first quarter of 2017, Hungarian GDP expanded by 4.1 per cent, faster than expected. Therefore, GKI revised its growth forecast upwards to an annual growth rate of at least 3.5 per cent before gaining detailed data. Construction and industry grew faster than previously thought, whereas the growth rate of trade was slower. This is particularly surprising in the light of extremely fast increase in wages.

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Faster than expected industrial and slower than expected retail growth

In 2017 the growth rate of the Hungarian economy accelerates from 2 per cent to 3.2 per cent, mainly due to the restart of EU transfers. Following their decline by 20 per cent last year, investments will expand by 8 per cent in 2017, whereas the growth rate of consumption will accelerate from 4.2 per cent to 5 per cent. As far as production is concerned, it will be boosted by construction, which has already been able to work off a large proportion of its decrease last year. Growth can be projected in all sectors, with the exception of agriculture, where a “natural decline” can be expected after last year’s uptick. Inflation will accelerate. Although external and internal equilibria will deteriorate slightly, they remain favourable. No substantial improvement can be expected in the main factors determining long-term development (in terms of the functioning of institutions, neglecting market solutions, and starting real structural reforms).

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