Robust short-term performance but major fundamental risks for medium term
Hungary’s current macro performance appears robust, with real GDP growth of 4-5%, low unemployment and low inflation by emerging market standards. However, major problems for the medium term include growth and a budget heavily reliant on unsustainable EU grants, inconsistent labor markets and growth and serious political distortions.
• Growth has been boosted by the EU, with fixed investment and construction output boosted by EU gift money.
• The external financing surplus is falling, as companies borrow more.
• The merchandise trade balance is going the wrong way because of strong demand and terms of trade losses. However, the services surplus is high and stable, the deficit in investment income is falling on improving net investment, and net EU transfers should remain stable.
• Merchandise trade is dominated by manufacturing, due to heavy vertical integration in European industry, especially in car manufacturing.
• There is an improving external investment picture because of the BOP surplus.
• Fiscal policy: low deficit, decreasing debt ratio, but current EU funds are running out, and transfer will fall with the current budget.
• CPI-inflation is going the wrong way; much of the rise can be blamed on fuel prices, but non-fuel and core prices could exceed the target by January.
• Wage growth is higher than it should be for the CPI target; wages are growing rapidly because of unfavorable demography, growing domestic demand for labor and liberalized labor markets within the EU.
• Current GDP growth is unsustainable due to a shortage of labor.
• Price stability would require tighter MNB and income policies
• Domestic social peace depends on economic success; Fidesz remains popular because people are used to a democratic deficit as long as they get jobs, income growth and freedom from everyday harassment.
• This is the massive political rigidity which keeps the GDP growth target high.
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