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European Commission Forecasts Hungary’s GDP Growth To Remain Above 2%


Hungary’s economy will grow by 2.1% this year and 2.5% next year, the European Commission said in a fresh report. EC’s forecast for this year was lowered slightly from November projection of 2.2%.  Last’s year’s estimated growth rate of 2.7% will not be matched because the absorption of EU funding and external demand will falter, though this will be partially offset by an increase in private consumption of around 3%.

Household spending should be boosted by a reduction in the personal income tax rate from 16% to 15% and the effect of an earlier government measure to convert retail foreign currency loans into forints, the EC added. Consumption should “remain robust” in 2017, driving growth. A reduction in the bank levy and new central bank policies providing subsidised lending to SMEs should create a “friendlier lending environment”, while a reduction in the VAT rate for home construction gives impetus to the home market, the report said. The forecast puts consumer price inflation at 1.7% in 2016 and 2.5% in 2017. Lower-than-expected oil prices, subdued imported inflation and low food prices are likely to keep CPI below the central bank’s 3% medium-term price stability target until the end of 2017, according to the forecast.

The EC projects the budget deficit will be 2% of GDP this year, in line with the government’s official target. It sees the gap narrowing to 1.9% next year. This year, lower spending on interest, savings on cofinancing for EU-funded projects and “contained” expenditures on social payments and operating costs are expected to counterbalance the impact of tax cuts amounting to 0.7% of GDP, the EC said. Hungary’s public debt as a percentage of GDP is expected to decline to 74.3% by the end of 2016 and 72.4% at the end of 2017.

Meanwhile the Fiscal Responsibility Institute (KFI), a Budapest-based think-tank, projected that Hungary’s economy would grow by 2.2% in 2016 after a growth of 2.9% in 2015. Balázs Romhányi, the head of the institute, said that in 2017 economic growth is likely to slow to 2%, even taking into account the effects of housing construction subsidies, VAT cuts for building and a faster drawdown of EU funding, he said. Lower oil and raw material prices will override upward pressures on inflation.

Growth in domestic demand and a weakening forint may push prices up but lower imported inflation and cheaper raw materials will act as offsets, he said. After a stabilisation in the price of raw materials, KFI expects steadily rising inflation, which should stabilise around the central bank’s target. Hungary’s budget balance will deteriorate in the medium term as government spending “promises” over the past few months will eat into the budget’s sustainability, Romhányi said.

The Hungarian government expects growth of 2.5% in 2016.

via and MTI