OECD predicts Hungary's GDP will grow by 2.5 percent next year

The OECD improved its 1.6 percent summer projection for Hungary’s growth this year to 1.7 percent

The Organisation for Economic Co-operation and Development (OECD) has lowered its projection for Hungary’s GDP growth next year to 2.5 percent in volume terms, from the 3.1 percent in the previous Economic Outlook released in June 2016.

The OECD 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 organization is projecting 2.2 percent GDP growth in Hungary, according to MTI.

The OECD states that 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 labor 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, followed by a 3.7 percent growth in 2018.

The private sector remains the main source of job creation, while the high level of enrollment in public work schemes is slowly coming down. Together with slower growth of the labor 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 at 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.

The National Bank of Hungary could keep its base rate steady, further reductions are not expected, as the central bank has signalled that these rates are in line with the 3 percent inflation target.