Growth Accelerated in Q4 2015
GDP growth accelerated sharply in Q4 2015, beating market expectation. The bright star must have been manufacturing, but a major upward revision of previous quarters’ data on sda basis also had a role. The VW scandal is not having a negative impact on Hungary. Indeed, Audi is planning to bring in additional assembly work, although the timing of this step is not known yet. In 2016, a marked slowdown is still likely, in response to decreasing EU transfers, the strong forint and the fading away of 2015’s disinflation surprise in income policies, a likely disappointment for most GDP forecasters.
In late January, Fitch Ratings (BB+/Positive) reiterated in an interview that for Hungary’s credit rating to return to investment grade, business conditions will need to improve in the economy and disciplined fiscal policy will need to continue. In practical terms, this requires the improvement of relations be-tween the government and banks, and the continued decrease of the gov-ernment deficit and debt ratios. According to Fitch, this could ensure the sustainability of the favorable macro developments seen in 2014-2015.
Detailed cash data on the 2015 central government budget verify our expec-tation of massive spending on EU-sponsored projects over and above the existing spending quotas. But even so, the fiscal cash deficit, excluding net EU-transfers, fell in 2015, just as it did in 2014 as well. However, the govern-ment debt ratio only fell because of a massive drawdown from bank depos-its in December. Net of deposits, the debt ratio rose slightly in 2015.
Year-on-year CPI-inflation came out below expectation in January. But this forms no basis for a base rate cut by the MNB, as the headline rate was pushed down by two non-core factors, and core inflation rose marginally. Limited growth prospects, weak oil prices and the strong forint will likely con-tain inflationary pressures around the current core level throughout 2016, with risk existing more on the downside for the time being.
The communiqué following the January rate-setting meeting opened up some room for speculation that the MNB might return to base rate cuts later in 2016 if external conditions would require so. However, it was quickly clarified that the Bank is looking at this option only as a remote chance currently, as it sees sufficient room for further easing through non-conventional measures. Meanwhile, over 60% of this year’s target amount for the IRS contracts linked to lending commitments (HIRS) has been auctioned to banks already. This suggests that lending to SMEs may finally turn up substantially this year.
Although Fidesz continues to be doing all right in opinion polls, it is starting to suffer in areas, which were hit hard by its fiscal reforms over recent years. In particular, employee protest is building up in the public education and health care sectors, where poor working conditions and weakening perfor-mance are becoming increasingly evident. Recently, Fidesz also managed to forge a full-scale opposition alliance, including center-left and radical right parties, against its proposal to amend the constitution so that PM Orbán could govern through government decrees, should a terror threat situation materialize. Compared to these domestic issues, Hungary’s otherwise diffi-cult relations with the EU seemed almost problem-free in recent weeks.
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