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2020: The Analysts Look Into Their Crystal Ball

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Just like a year earlier, analysts’ predicted growth forecast for 2019 fell short of the actual rate the economy grew by last year. Among the reasons were strong domestic consumption, still on the rise, and a high volume of investments. The global economy impacted Hungary less than experts thought would be the case. The Budapest Business Journal asked senior analysts about the country’s economic outlook in 2020.

K&H Bank

“The economy grew faster than we thought: we put growth somewhat below of 4% and now it looks it is going to be around 5%,” Dávid Németh, senior analyst of K&H told the BBJ. “The Purchasing Manager Index was dropping globally and we were not sure to what extent it would affect Hungary, hence our pessimism,” he adds.

Growth in Hungary and the entire region has been quite favorable. But how could this region remain more or less unaffected from the deterioration of the external environment? High employment and very low unemployment rate, and growing purchasing power have all been driving growth, Németh says.  

EU-funds also helped growth remain strong compared to more mature economies, such as Germany. From a fiscal point of view, there is no need for austerity in any of these countries: most have low state debt and an interest rate environment and that helps spur growth, the expert says. In addition, much of the production comes back to Europe or is not taken elsewhere, for example, to China, for fears of a potential trade war. All these factors lead to a stronger growth in the region and Hungary.  

How will the economy look like this year? The Hungarian economy is expected to slow down: GDP growth of 4.8% this year is expected to decline to 3.5% in 2020, while investment growth of around 20% may slow significantly, according the analyst.  

The more subdued economic and investment performance can be explained by the smaller role of EU funds, a slowdown in construction development, and the uncertain international environment.

Despite some easing, the labor market will remain “tight” this year, but slightly less so than in the previous years. The fact that both the global and the Hungarian economy will slow down means that companies will need less labor.  

Also, to handle the labor shortage, companies have taken steps to replace and reduce their need for human workforce. These investment are now turning to fruition and easing pressure.  

At the same time, the pool of employable workforce is shrinking. Ageing baby boomers (in Hungary known as the Ratkó generation, named for Anna Ratkó who served as Minister of Health when the communist government introduced a severe ban on abortion in 1952, which remained in force for four years) are retiring and the number of new entrants is too low to replace them. Overall, the pressure will be less on companies, Németh notes and wage growth will continue, though at a lower rate.  

Purchasing power will be slightly less strong than last year, but households will continue to take out loans. As a result, domestic consumption, will remain strong in 2020 as well. Inflation will be around 3.5%, with some fluctuation throughout the year. It will be at its highest, about 4%, at the beginning of the year; in May and June, it will drop back to 3% and will be 3-3.5% for the rest of the year.  

The Hungarian currency has been weakening constantly and its depreciation will continue next year: it may weaken by as much as 2% annually in 2020. Its range will be between HUF 328-336 – with HUF 330 in the first half and around HUF 340 in the second.  

Dávid Németh, senior analyst of K&H.

GKI Economic Research  

“No one expected that rate of growth,” says András Vértes, chairman of GKI Economic Research. “The National Bank of Hungary, the European Commission, the IMF all had a more conservative forecast.” Estimates put growth between 3.7-4.3%, as opposed to about 5% we are likely to see mostly because everyone overestimated the effects of the slowing global economy on Hungary.

The slowdown of the auto industry in Germany has impacted car manufacturing in Hungary much less than expected; probably because companies cut output at home rather than here where manufacturing costs are lower, Vértes says. The government also boosted growth with “tools” such as child-support loans, Vértes adds.  

This year, however, a slowdown is guaranteed, experts agree. GKI puts 2020’s growth figure at 3.2%, which is roughly the consensus, Vértes notes. Worldwide, economies, and the global environment are losing momentum. Growth is unlikely surpass 0.5% in the EU, not to mention the uncertainties surrounding Brexit, which all contribute to the moderation of growth.  

In Hungary, one main driver of the growth has been EU-funded investments. “Although Hungary has not received a large portion of these funds, much of the achievements, investments and works set for the current seven-year-old period has been done. Growth in the construction industry will slow down as well, and so will car manufacturing. Also, the previous years’ acute labor shortage seems to be decreasing as well. The 2021-2027 EU multiannual budget has not been finalized yet, which also supposes a delay in the distribution of funds.

The rapid wage growth of 8-9% in recent years (6-7% real growth) may “work” for large companies but small firms, accounting for 94% of all businesses in Hungary, have a hard time keeping up. Wage growth will still be strong but a slowdown will start here as well, Vértes says.   

Another factor that will curb growth, though not instantly is the decline of EU funds. Under the current budget period, Hungary has received 4% of its GDP in funds (of which it paid 1% back).  

“We don’t know at this point how the new budget will look but, at best, Hungary will receive roughly half of what it does now, approximately 1.5% of its GDP. The reasons for the decrease is the growth of the country as well as some new priorities within the EU,” Vértes notes adding that rule of law issues may also play a part.  

Hungary “stands out” in three fields from the EU. One is inflation, currently almost the highest with only Romania ahead. Hungary has failed to modernize fields such healthcare or education as well and is among the worst performers in Europe in terms of the government’s activity in those fields, Vértes says.  

The car manufacturing industry, a strong pillar of the country’s economy, will probably not progress at the same pace, he adds. A fourth element which puts the country in an unfavourable position is corruption.

OTP Bank

Analysts concerns in terms of the negative effect of the external environment or its extent in general proved wrong. “Everyone expected the external environment to affect Hungary more,” Gergely Tardos, senior analyst of OTP Bank says.

In the first half year, it was investments that brought stronger growth. Strong export and industrial activity further enhanced growth, which was not coupled with the deterioration of the current account, Tardos says. The volume of foreign currency debt has shrunk considerably; the National Bank of Hungary has more room for maneuver, too, he says.  

With regards to this year, this dynamic growth will definitely slow down, the expert says. One major reason is that state investments financed with EU money are starting to decline, in part because much of them have already been done and paid in advance.  

As a result, the construction sector will also see a slowdown and not even strong demand from the private sector will be able to counter this. This year, the negative external environment will have effect on the economy. (Last year, it was state investments that cushioned its impact).  

There a lot of uncertainties Europe and worldwide: the European economy is continuing to slow, Brexit is still to be finalized, and major global economies such India and China are also facing setbacks.  

What will propel the Hungarian economy is strong internal demand, Tardos notes. Because of this, the expert puts this year’s GDP at 3.3%. Inflation will likely peak at 4% at the beginning of the year, though later it may drop to 3-3.5%, the forint will continue to weaken by HUF 4-5, and interest rates will stay neutral, according to the expert.

Kopint-Tárki

Following strong growth in 2019, Kopint-Tárki expect a significant slowdown of the economy in 2020 and puts this year’s growth at 3-3.5%.

The fact that the use of available EU funds has peaked in the current budget cycle contributed to the previous year’s growth significantly, mostly in the field construction and investments. This growth, however, is expected to slow down in 2020 due to a smaller inflow of EU funds.

On the consumption side, outstanding export growth was measured and, as a result, net exports again contributed positively to economic growth. Household consumption has remained unaffected by the gradually decreasing real wage growth rate. Strong borrowing activity also help keep it high.  

Still, analysts expect some moderation in consumption dynamics in 2020 due to the continuing slowdown in real earnings growth. Overall, Kopint-Tárki expects domestic consumption to remain a solid pillar to economic growth in the coming quarters.

Kopint-Tárki’s inflation estimate is 3.4% for 2020. The upward momentum of the consumer price index, caused by the price increase of consumer goods and food is expected to continue. The 3 ± 1% inflation target may not be reached but, overall, inflation will be quite high compared to the rest of the EU, the organization forecasts.

With 2019’s accrual-based general government deficit expected to be at 1.8%, Kopint-Tárki considers the 1% budget deficit target for 2020 to be achievable. Government debt may continue its slow decrease, they say. The restructuring of government debt will also continue with the share of forint debt and the weight of households increasing.  

Regarding the currency, analysts does not rule out a possible further slowdown in the exchange rate, after the forint hit a psychological barrier in November 2019 (337 HUF/EUR) but they do not expect a dramatic fall. In the short-term, a slight exchange rate correction in the direction of exchange rate appreciation might even be possible, Kopint-Tárki notes. 

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