Tsunami of government programmes

The Hungarian economy grew by 4.9 per cent in 2018, and it was probably the second fastest growth rate in the EU after Poland. In the past decades, faster growth was registered in Hungary only once, in 2004. All forecasts expect a significant slowdown in 2019. GKI predicts a rate of around 3.5 per cent. GDP growth in the EU is also slowing down, and the European Commission cut its growth forecast from 2 per cent to 1.5 per cent in 2019, after last year’s 2.1 per cent. Although the indicators of economic disequilibria are favourable (two credit rating agencies upgraded Hungary’s general government debt), the foreign trade surplus is falling significantly, and inflation and the general government deficit are among the highest in the EU. Over the past few weeks, a tsunami of government programmes swept across the country.

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Forecast for 2018/2019

The Hungarian economy grew faster than expected, by 4.9 per cent in the third quarter of 2018, and such quarterly rate has been unprecedented for thirteen years. The Hungarian GDP growth rate according to the EU methodology was more than double the EU average in the first three quar-ters of 2018, one of the fastest in the CEE region. This is certainly the zenith; the growth rate will slow down.

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Growth is fast but inflation is also fast

After a GDP growth rate of 4.8 per cent in the third quarter, which was one of the fastest rate in the EU, GKI, similarly to other forecasters, raised its GDP forecast, too (to 4.5 per cent). At the same time, GKI maintains its expectation of slowing down to 3.2 per cent in 2019. The reason for this is that the stimulating effects of EU transfers is decreasing, global economic growth is precarious, and there is still no prospect of improving competitiveness. Inflation is accelerating in 2018, and external and internal equilibria are deteriorating. In this regard, no change can be expected in 2019 either.

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Forecasts for 2018-2019

The Hungarian economy grew by 4.8 per cent in the second quarter of 2018, and such quarterly rate has been unprecedented since 2005. The Hungarian GDP growth rate according to the EU methodology is double the EU average, one of the fastest in the CEE region. This is the zenith; the growth rate will slow down. The rate of increase in investments financed by pre-payments of 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, a slight deterioration is expected in external demand as well. Based on the better than expected figures of the second quarter, GKI raised its GDP forecast for 2018 to 4.2 per cent from 4 per cent and its investment forecast to 12 per cent from 9 per cent. However, it expects a marked slowdown in 2019, a growth rate of around 3.2 per cent. External equilibrium is likely to remain very favourable in 2019, inflation is expected to accelerate, and fiscal and monetary policy tighten only slowly. Possible corrections of economic policy will hardly affect the substance of the one-centred Hungarian political model.

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Growth faster than expected but slowing down

Although the Hungarian economy grew faster than expected and most EU member states in the second quarter of 2018, its growth rate calculated by the EU methodology has been slowing down for six months. According to market forecasts, GDP growth will exceed 4 per cent in 2018 (GKI upgraded its forecast to 4.2 per cent). It will fall to nearly 3 per cent next year, which would be among the lowest in the CEE region where the decline will be more moderate. 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. There is growing uncertainty and slowdown in the EU, due to, for example, the Turkish and the Italian situation, the threat of a trade war and the Fed’s interest rate rises.

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The archive of earlier forecasts is available here.

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