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Summary of Hungary Economic Outlook - March 2017

Core Content Overview

This report provides an economic outlook for Hungary for the years 2017 and 2018, focusing on GDP growth, inflation, fiscal policy, external accounts, and monetary policy. It is authored by BNP Paribas and highlights the country's economic trajectory in the context of the broader European economy.

Economic Forecasts

• GDP Growth:

  • Revised up to 2.3% for 2017 from 1.6% previously, driven by stronger-than-expected eurozone growth.
  • Expected to grow at 2.2% in 2018.

• Investment:

  • A sharp decline of 14.6% in 2016, but expected to rebound to 3.7% in 2017 due to EU funding.
  • Investment growth is projected to remain modest in 2018 at 4.0%, hindered by ongoing labor shortages.

• Private Consumption:

  • Expected to be a strong contributor to GDP growth in 2017 and 2018.
  • However, accelerating inflation will reduce real purchasing power for households.

• Current Account:

  • Surplus is expected to narrow from 4.7% of GDP in 2016 to 2.1% in 2017 and 1.9% in 2018, due to rising commodity prices and increased domestic demand.

Inflation Outlook

• CPI Inflation:
  • Expected to average 3.2% in both 2017 and 2018, driven by higher fuel and food prices.
  • Core inflation is anticipated to rise above 3% in late 2017 due to strong wage growth.
  • Tax cuts on food and services are expected to reduce inflation by 0.5-0.7 percentage points in 2017, with further tax reductions possibly in 2018.

Fiscal Policy

• Budget Gap:

  • The budget gap is expected to rise to above 2% of GDP in 2017 and 2018 due to tax cuts.
  • Despite this, the budget is expected to remain above the -3% of GDP EU threshold.

• Public Debt:

  • Public debt-to-GDP ratio is projected to decline to 71.3% in 2018 from 74.4% in 2016.

Monetary Policy

• Policy Rate:

  • The policy rate is expected to remain unchanged at 0.90% for 2017 and 2018.
  • The National Bank of Hungary (NBH) is aiming to keep the forint weak to counter appreciation pressure, accepting deeply negative real rates.

• Exchange Rate Outlook:

  • EUR/HUF is forecasted to trade at 312 by end-2017 and 320 in late 2018.
  • A more hawkish global central bank bias may allow for forint weakening in 2018.
  • EUR/USD is expected to reach parity by end-2017, potentially leading to slight HUF weakening.

External Accounts and Trade

• Trade Balance:

  • Expected to remain stable at around 7.8-7.9 EUR bn in 2017 and 2018, with a slight decline from 9.9 EUR bn in 2016.

• Current Account:

  • Surplus is projected to decrease to 2.1% and 1.9% of GDP in 2017 and 2018, respectively.

Key Factors Influencing the Outlook

• Eurozone Growth:

  • Expected to grow slightly in 2017 and 2018, which will support Hungary's economic activity.

• Labor Market:

  • Tight labor market supports nominal wage growth but limits investment due to labor shortages.

• Monetary Policy Tools:

  • Unconventional measures (e.g., FX swaps, deposit facility reductions) are being used to maintain liquidity and keep the forint weak.

Legal Disclaimer

• The report is produced by Bank BGZ BNP Paribas and reviewed by BNP Paribas.
• It does not contain investment research recommendations.
• It is intended for Professional Clients and Relevant Persons as defined by MiFID and other financial regulations.
• The information is based on public sources and not independently verified.
• The report does not constitute an offer or solicitation to buy or sell any securities.
• It is not a prospectus and may not be suitable for all investors, particularly those not qualified as "Qualified Investors" in Switzerland.

Conclusion

Hungary's economic outlook for 2017 and 2018 is characterized by a modest recovery in GDP growth, driven by the eurozone and EU funding. Inflation is expected to rise, impacting real purchasing power, while fiscal policy remains accommodative. The forint is anticipated to remain weak, and the current account surplus is projected to decline. The report emphasizes the importance of legal and regulatory compliance, targeting specific investor categories.