Hungary’s economic policy goals and the room of manoeuvring for the economy after the elections

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.

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Consumption of households grows rapidly this year 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.

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The archive of earlier forecasts is available here.

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For the time being, GDP growth is relatively fast

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.

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The Hungarian economy before elections

Although Hungary’s GDP expanded slightly faster than expected in 2017, by 4 per cent and considerably faster than the EU average, its growth rate was moderate in the CEE region. GKI do not change its GDP forecast of 3.8 per cent and investments forecast of 9 per cent for 2018. However, it raises the projected increase in consumption from 3.5 per cent to 4 per cent. Although last year’s soar of construction slows down in 2018 due to the high statistical base, this sector continues to grow fastest. Similarly to last year, industry will grow by 5 per cent in 2018. The decline in agriculture in 2017 is expected to be followed by some increase this year. Public administration will stagnate, whereas some acceleration can be expected in the financial sector. Compared to its previous projections, GKI cut its inflation rate forecast from 3 per cent to 2.7 per cent, and its unemployment forecast from 4 per cent to 3.7 per cent.

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Yesterday’s FDI dependency remains today’s reality

In 1990 Hungary decided to employ the then prevailing model of economic transition from a state run economy to one based on market principles. It entailed mass privatisations of previously state run companies and the opening up of its borders in front of international capital without much mitigation with regards to its destination and long term objectives.

A study by GKI researcher Máté Veres for the Friedrich Ebert Stiftung. Download the study from here.