European Commission sees GDP growth in Hungary but business expectations deteriorate

Budapest, Hungary (Marcell Katona, CC BY-NC-ND)

The European Commission (EC) expects Hungaryʼs GDP to grow 2.5 per cent in 2016 and 2.8 per cent in 2017, an increase on both figures from the winter projection.

In addition to growing private consumption, investments are expected to drop less this year than earlier thought, helped by measures to boost the housing market and by more state investment, which will result in faster pick up next year, in contrast to earlier forecasts, the EC’s spring European economic forecast notes.

Following improvements in 2014 and 2015, the general government deficit is expected to stabilize at 2 per cent of GDP “despite a significantly increased fiscal room,” the EC said, basing its forecast on a no-policy change assumption. In the previous report released in February it forecast the ratio to remain at 2 per cent this year before a slight drop in 2017.

The EC forecast could not take into account the 2017 budget bill which was not released by the forecast’s cut-off date. The 2017 budget bill submitted to parliament in April projects an ESA 2010 deficit of 2.4 per cent of GDP.

The Commission now expects the structural budget balance to deteriorate sharply, to a further -2.9 per cent of GDP in 2016 and then – based on the same no-policy-change assumption – to reverse to around -2.5 per cent in 2017. Both figures are up from the respective -2.5 per cent and -2.2 per cent of the winter forecast. In addition to the cyclical upturn, the deterioration reflects one-offs, the EC said.

After dropping 0.9 of a percentage point to 75.3 per cent last year, Hungary’s state debt as a percentage of GDP will remain on a declining path, dropping to 74.3 per cent at the end of 2016 and to 73 per cent at the end of next year, “even though delays in the receipt of EU funds are assumed to have a debt-increasing effect throughout the forecast horizon”, the Commission said. The 2017-end figure was raised 0.6 of a percentage point from the winter forecast.

Confidence is decreasing

According to the survey done by a think tank GKI, confidence in the economy decreased slightly in all sectors and also among consumers, compared to its high level in January. Expectations became noticeably less favorable in all sectors of business except for trade.

Assessment of production in the preceding period, stock of orders (including exports) and prospects deteriorated, while inventories remained unchanged.

According to respondents the period covered by contracts was slightly shorter and the volume of new orders was lower than in January.

The construction confidence index fell to its February level. The assessment of production in the preceding quarter slightly deteriorated, whereas that of orders improved.

The trade confidence index rose slightly in April, although did not reach its February level. The index remained within the relatively narrow band in which it has fluctuated in the past two years.

Assessment of sales positions slightly deteriorated, whereas that of expected orders and the level of stocks became somewhat more favorable.

The services confidence index fell for the third consecutive month and it returned to its level at the end of last year. Especially the evaluation of the general business climate deteriorated, whereas sales expectations slightly improved.

Although willingness to employ in industry intensified, it dropped in construction markedly, and less in services and trade. The fear of unemployment of households eased. Intentions to raise prices increased slightly in services and in industry.

However, after a surge in March, they virtually disappeared in construction, similarly to trade, where companies seeking to maintain prices were in vast majority. Inflationary expectations by consumers eased.

In April, the assessment of the future of the Hungarian economy was slightly more optimistic in industry and among households than in March, and it remained unchanged in construction, whereas it was more pessimistic in services and much more pessimistic in trade.

GKI’s consumer confidence index picked up slightly after a decrease in March, though the increase did not compensate for the loss in the previous month. In April households assessed their financial situation for the following year slightly better and their saving capacity worse than in March. Households considered the current possibility of purchasing high-value durables better, whereas their expectations for the next 12 months remained unchanged.

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