The Organisation for Economic Cooperation and Development lowered its projection for Hungary’s GDP growth next year to 2.5 percent in volume terms in a forecast published on Monday from the 3.1 percent in the previous Economic Outlook released in June.
The OECD however improved its 1.6 percent summer projection for Hungary’s growth this year to 1.7 percent in the autumn edition of the World Economic Outlook. In newly released data for 2018 the organisation is projecting 2.2 percent GDP growth in Hungary.
László Balogh, Ministry of National Economy deputy state secretary, said the OECD’s predictions about quicker-paced economic growth for next year, consumption-fuelled domestic growth and higher EU financing are in line with the government’s expectations.
Balogh said policy steps advocated by the OECD are similar to ones taken by the government in the past five years. The government targets a higher economic growth rate in 2016 than the OECD, at 2.5 percent of GDP.
According to the OCED, in 2016 economic growth slowed because of a sharp reduction in public investment in infrastructure arising from the slower disbursement of EU structural funds at the beginning of the new funding cycle.
Better credit conditions and higher lending activity are supporting business investment, especially in manufacturing, despite profits being squeezed by higher unit labour costs that resulted from declining productivity. Housing investments should also pick up along with higher subsidies and a recovery in housing loans.
Private consumption sustained its brisk pace on the back of rising real incomes. Consumption should continue to expand robustly as real incomes continue to increase, supported by lower personal income tax and VAT on selected goods. Consumption should grow by 5 percent in 2016 then by 3.8 percent in 2017 and 3.7 percent in 2018.
The private sector remains the main source of job creation, while the high level of enrolment in public work schemes is slowly coming down. Together with slower growth of the labour force, this has reduced the unemployment rate by almost 2 percentage points over the past year, to around 5 percent.
Headline inflation hovered around zero until late 2016, when the impact of previous declines in energy prices came to an end and higher indirect taxes pushed it to 1 percent. Inflation could be at 1.4 percent in 2017 and 2.5 percent in 2018.
Export growth is projected to fall as competitiveness will continue to be eroded by higher wage costs and slow productivity growth. Exporters have been sustained so far only because firms have cut prices but this cannot continue indefinitely.
Export growth could fall from 8.1 percent this year to 4.8 percent next year and 4.3 percent in 2018. Hungary’s state debt, calculated according to Maastricht rules, should decrease from 75.1 percent of GDP in 2016 to 74.1 percent in 2017 and 72.8 percent in 2018.
CIB more optimistic
CIB Bank analysts project Hungary’s GDP growth will accelerate to 2.7pc next year from 2.1pc in 2016 but still remain under the government’s respective targets, the lender said in a quarterly outlook on Monday. The government puts GDP growth at 2.5pc this year and 3.1pc next year. Growth will accelerate next year as domestic demand expands and payouts of European Union funding increase, CIB said. The bank projects annual average inflation of 0.4pc in 2016 and 2.2pc in 2017.