Facing the Growth Test in 2016
GDP growth slowdown, verified by data for Q2 and beyond, will probably persist for the rest of 2015 and 2016, with annual growth at 2.5% this year, just 1.2% in 2016, and a recovery to 2% in 2017, in response to the pick-up of EU transfer distributions from the EU’s 2014-2020 budget. Factors behind the 2015-2016 slowdown include the expected drying up of EU transfer inflows; continued tight fiscal policy; and the fading of the positive impact of the “bank settlement process.” The recent deterioration of global growth prospects and the negative impact of the Volkswagen scandal are other factors in that direction. A partially compensating positive factor will be easy monetary policy, based on disinflation caused by falling energy prices.
The most striking change from our last Quarterly forecast is the plunge in crude oil prices, which has again pushed consumer inflation into negative territory. As an early rebound of oil prices seems unlikely, prospective short- and medium-term inflation also seems limited, allowing the MNB to continue its renewed easing course. The key question here is how the MNB can ease further, after its recent innovative use of sterilization policy, reserve ratio rules, bank supervisory requirements and the interest rate corridor, instead of cutting the base rate. To be successful, policy will have to be refocused on the support of bank lending to the economy, from mainly rounding up domestic funds to finance the government budget.
The 2015 budget was hit by unforeseen negative events, like the refugee issue, and a debate with the EU on tax policy. But thrifty spending policies and sufficient tax collection have kept the deficit well on track to meet the annual target. In cash terms, however, the picture looks markedly worse, due to suspensions and delays in EU transfer reimbursement. So reducing the gross debt ratio further in 2015, which is both a constitutional and an EU requirement, will likely be possible only if the government issues new debt below plan, and draws down cash from its deposits. Judging by the budget approved for 2016, fiscal policy will become much more restrictive.
There has been much speculation about a possible upgrade for Hungary, and not entirely without reason. The government’s credit rating has been improving on contained fiscal deficits, large external income surpluses and the reduction of FX risk in the domestic banking sector. But a return to investment grade may be blocked by low potential growth, high government debt and the treatment of foreign/private investment in certain economic sectors.
The government’s defensive migration policy has proven popular in Hungary, helping Fidesz earn back much of its lost popularity since October 2014. Prime Minister Viktor Orbán has also managed to improve his position internationally: although he is still heavily criticized and even condemned by many, the balance of pros and cons has clearly moved in his favor. Capitalizing on this gain, Orbán quickly moved to reshuffle his government, for among other reasons, to reinforce his primacy and control through a classic example of a divide and rule style policy.
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