The Hungarian economy grew by 4.4 per cent in both the last quarter of 2017 and the first quarter of 2018. A growth rate faster than this was registered only once in the past decade. This is the fourth or fifth highest rate in the CEE region, and Hungary is likely to be at the peak of its current business cycle. The rate of increase in investments financed by EU transfers and in household consumption, boosted by the elections as well, is expected to slow down during the rest of the year. In addition, external demand is expected to deteriorate rather than grow further. However, based on the better than expected figures of the first quarter, GKI raised its GDP forecast for 2018 to 4 per cent from 3.8 per cent and its consumption forecast to 4.5 per cent from 4 per cent. GKI raised its inflation projection to 3 per cent due to the rise in world oil prices and lowered the expected general government deficit to 2.2 per cent of GDP as a result of a shift in the government’s economic policy.
GKI’s economic sentiment index reached another peak in June. According to the empirical survey conducted by GKI with the support of the EU, business expectations in June were close to their peak reached in February, and consumer ones remained hardly below their peak as well.
As GDP, earnings and consumption grew faster than previously thought, GKI raised its 2018 GDP growth forecast from 3.8 per cent to 4 per cent. Although the foreign trade surplus is decreasing due to the rapid rise in domestic consumption, the external balance will continue to improve as a result of mounting EU transfers. Owing to the substantial advance payments from the general government necessary for accelerating EU transfers, the general government deficit in cash flow terms will be high and the decline in government debt will be modest. The EU is expecting an adjustment from the Hungarian government due to a high deficit compared to the favourable economic situation. Although the risk of escalating global trade war has declined, the Iranian, Turkish, and Italian situations have already had negative effects on energy prices and exchange rates.
The GKI economic sentiment index deteriorated marginally in May. According to the empirical survey conducted by GKI with the support of the EU, this was the result of the deterioration in consumer expectations as business expectations improved slightly. Nevertheless, the GKI economic sentiment index is only slightly below its historic peak reached in February.
Being at the helm for eight years, Fidesz-KDNP won a two-thirds majority in the parliamentary elections again on April 8th. This is expected to entail a stronger establishment of the one-centred Hungarian political model than before. The continued deterioration of competitiveness, the deepening conflicts with the EU and the uncertain decline in EU transfers after 2020 pose great challenges to the sustainability of this policy. The idea of drastically stimulating corporate and retail borrowing instead of strengthening competitive market conditions seems to be a new problem rather than a solution. However, the GDP growth rate may be close to 4 per cent in 2018.