Much Uncertainty about Brexit, Turnaround to Come from Mid-2016
The Brexit vote of late June has left behind a great deal of uncertainty and the prospect of highly incalculable consequences. The only thing that seems rather certain is that the legal status quo within the EU is unlikely to change before 2018. Even after that date, the UK will remain most probably a member of the European common market, so that its trade with the EU will not be hit by customs duties and other trade barriers, and the British government will not oust guest workers from CEE member states.
But from 2019 or from the date when Brexit actually happens, development transfers to Hungary from the EU will likely fall by up to 9%, as the UK will cease to act as a donor state or at least cut its contribution radically. Simultaneously, access of Hungarians to the UK’s labor market and particularly to British welfare policies will likely be tightened. The latter will most probably slow down the increase of Hungary’s labor income earned in the UK. However, Brexit could affect direct investment into Hungary positively if the British economy ceased to be an intra-EU competitor.
Between 2016-2018, Hungary will likely suffer from the uncertain and risky outlook of Brexit largely as much as the rest of the EU, due to increased volatility on financial markets, possible stability problems and the resulting losses of demand, output and investment. Given its small, open economy status, any hit on GDP is likely to be bigger in Hungary than in a sizable Western European state. However, the improvement of stability indicators in recent years suggests that Hungary is relatively unlikely to run into trouble due to its own financial vulnerabilities if the consequences of Brexit turn really unfavorable.
Hungary went through a tough macroeconomic stress test in early 2016, as a sharp downturn of the distribution of EU funds was combined with the restoration of full balance in the government budget in January-May. These two factors slowed down GDP growth considerably, but a recession is unlikely to develop, due to faster EU distributions from June, and an expansive wage policy that should result in robust consumer demand for this year. 2017-2018 will likely see genuine election campaign policies, with looser fiscal policy, high wage growth and rising fixed investment, GDP growth returning to 3%.
The Brexit outlook clearly means a somewhat weaker currency and less potential if any to cut central bank rates, but the forint story is unlikely to change to any major extent. We expect unchanged interest rates between now and the parliamentary election in April 2018, and the restoration of a moderately depreciating trend of the forint vis-à-vis the euro.
Recent media speculation about Hungary’s potential exit from the EU, following the British spirit, sounds greatly unrealistic. A Huxit would be highly unpopular, and send the economy into a severe decline. The Fidesz government, which remains firmly on the top place in domestic polls, will likely join other CEE states which demand a reform of the EU instead, and concentrate on mobilization against the EU’s most recent plan on migration policy.
Now read on...
Register to sample a report