Hungary may end up on periphery of EU, GKI warns

Although Hungary’s GDP expanded last year by 4%, faster than expected and considerably faster than the EU average, its growth rate remained comparatively moderate in the CEE region, GKI notes. The institute says it is not changing its GDP growth forecast of 3.8% and investment growth forecast of 9% for 2018.

At the same time, GKI is raising its projected increase in consumption from 3.5% to 4%.

Although last year’s boom in construction will slow in 2018 due to the high statistical base, this sector continues to grow fastest, GKI observes. Similarly to last year, it predicts industry will expand by 5% in 2018.

The decline in agriculture in 2017 is expected to be followed by some improvement this year, says GKI. Public administration will stagnate, whereas some acceleration can be expected in the financial sector, it adds.

Compared to its previous projections, GKI has cut its inflation forecast from 3% to 2.7%, and its unemployment forecast from 4% to 3.7%.

Post-election problems to solve

The three main problems of Hungarian economic policy, as GKI sees it, are the elimination of competition, the erosion of human capital, and international isolation.

After the elections, it will be necessary to reconsider Hungary’s European policy, including the introduction of the euro, which will inevitably affect the Hungarian model as well, GKI notes, adding that its forecast does not deal with the outcome of the elections. Instead it points to what it believes would be expedient to do, whoever wins.

Although the jobless rate has decreased significantly, employment growth has slowed from about 1.6% in 2017 to about 1% as the number of working-age people has dropped due to demographic changes, observes GKI. It adds that the number of available workers is limited, due to poor training structure, foreign employment, and the low work ethic in certain strata of society. Labor shortages represent one of the major obstacles to growth, it warns.

GKI says that this year GDP growth could yet surpass its forecast of 3.8%, fueled by the more favorable performance of agriculture and a more dynamic increase in domestic consumption. However, it warns that the price of the latter would be a deterioration in external equilibria  in excess of projections.

Regarding the medium-term outlook for the Hungarian economy, the most significant risk GKI highlights is the immutability of the government’s European policy, with all its domestic implications. GKI warns that as a consequence, Hungary could be pushed to a position of marginal importance in the European Union.