Fighting for Growth in 2016
Though slightly stronger in Q3, GDP growth’s decelerating trend has also been confirmed. Y/y growth was pulled down by this year’s poor agricultural results; if we exclude those, the slowdown from 2014 is barely noticeable. However, the real story is told by the recent q/q growth rates, which suggest significant cooling. Curiously, the remaining strength came from services, primarily trade and tourism; industry and construction, the 2014 frontrunners, actually fell in Q3.
Consumer inflation moved up to a materially positive y/y level in November, on base effects, rather than current price increases. On the same basis, we expect headline inflation to rise to 1.5% y/y by January, in which case the MNB base rate would turn negative in real terms. But the current very strong balance of payments, and the prospect of weakening growth in 2016, will most likely hold back the MNB from tightening on this news. On the contrary, the MNB may ease policy further through unconventional methods, to keep the HUF competitive.
The MNB continues the second phase of de-sterilization, started in late September. This, and active MNB talk stressing the Bank’s easing bias, pushed the EURHUF higher in early December. Content with this result, the Monetary Council refrained from further loosening at its December meeting, choosing a wait-and-see approach ahead of the Fed’s crucial interest rate decision, and the end-year measurement point for the government debt ratio.
Our expectation that the general government budget would be roughly balanced in January-October was confirmed by Q3 net financing data; this situation didn’t change much in November. The result was based on rather tight spending management, likely due to fears about the end-year debt ratio, and to lay the ground for a more expansionary fiscal policy in 2016. The annual fiscal deficit will probably be well within target, and possibly even below 2% of GDP. The debt ratio target for the end of 2015 is also likely to be achieved.
The government is proposing a steep cut in the VAT on new apartments, and a similar cut in the banking tax, the latter by more than promised to the EBRD this February. Both measures aim to stoke growth in 2016, directly and through more active bank lending. In addition, they are rushing to make new EU funds available to domestic users, and have set a very aggressive distribution target for 2016. An amended version of the Quaestor Act is also back on the table, but this time it seems acceptable to banks.
The positions of the Merkel-Hollande liberal approach to migration have greatly weakened ahead of the December EU summit. This means PM Viktor Orbán has been partly vindicated, and the risk of his isolation within the EU has fallen. Meanwhile, all is remarkably quiet in domestic politics. No liberal street demonstrations like last winter’s have taken place over the past six months. Opposition parties and trade unions are inactive, missing opportunities to speak out against the government. In November, Fidesz made further gains in the polls, due to robust wage and employment growth, and to Orbán’s continued success in handling the migration issue.
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