World Economy

Hungary’s Economic Momentum Slows

Hungary is particularly exposed to the auto industry capex cycle.Hungary is particularly exposed to the auto industry capex cycle.

Last year, the Hungarian economy expanded strongly by 2.9%; however, the momentum is decelerating at a rapid pace in 2016.

New orders from the eurozone are sluggish and Hungary is particularly exposed to the auto industry capex cycle, noted Commerzbank in a research report. Moreover, the EU fund inflow is slower in 2016 due to the program switch to the new 2014-2020 one, EUBulletin reported.

The latest manufacturing print affirms a loss of momentum, with industrial production back near its 2014 level in absolute terms. The PMI has dropped back to close to 51. Brexit is unlikely to greatly impact the Hungarian economy within the forecast horizon; however, there is still expected to be a general investment downturn, said Commerzbank.

So far in 2016, the Hungarian economy has expanded below 1% annualized. Certain acceleration in the second half is expected, driven by a rebound in EU funding and scheduled capacity expansion by auto majors. However, even with this, the full year economic growth is expected to be below 2%. It is likely to come in at 1.8% this year and at 2.5% next year, according to Commerzbank.

Meanwhile, inflation is likely to accelerate from currently negative to above 1% by the end of 2016, thanks to the base effect from utility price cuts. However, the inflation outlook is quite benign than in recent years and the Hungarian central bank has cut its forecasts for this year to 0.5% from 1.7%. The MNB also lowered core inflation forecast to 1.5% from 2.4%. However, there continues to be a slight downside risk to the inflation forecasts, noted Commerzbank.

In the meantime, central bank has lowered its benchmark rate to 0.9% in 2016 and has hinted that easing cycle is finished for now.

“The MPC maintains flexible wording around this guidance, and while the likelihood of rate cuts already in coming months is low, we retain our forecast of lower rates during 2017, potentially to 0.5%”, said Commerzbank.

The Hungarian central bank is likely to strengthen its QE program through several schemes.