Hungary’s economic growth may slow down in 2020

English2020. jan. 23.Növekedé

Hungary’s economy is expected to grow 3.5% this year, aided by strong domestic consumption, private investment stability and newly added export capacities. Növekedé have talked to senior analysts of MKB Bank and Erste Bank.

Last year’s economic growth rate of approximately 5% is expected to drop to 3.5% this year, with some upside potential. Next year’s growth will likely be determined by private sector consumption supported by rising wages and strong private investment supported by increased bank lending.

In 2020, the growth of public investment may fall back to 4%-6% per year, due to an anticipated decline in available EU funds.

Following a strong rate of growth in 2019, private investment may slow slightly this year, due to a general weakening of the global market decreasing demand for Hungarian exporters. However, this decline will likely be cushioned by newly added domestic production capacities serving those more resilient sectors of these export markets.

Following a strong economic growth rate of 4.8% in 2019, growth will likely to drop to 3.5% in 2020, according to Ákos Kuti, senior analyst at MKB Bank. The rate of real economic growth was above the potential (long-run sustainable) growth level in 2019, but will likely drop below potential in 2020. This implies the business cycle of the Hungarian economy will have peaked in 2019.

Low unemployment rates caused wages to climb as the economy almost entirely absorbed the employable workforce over the last two years. However, this means employment growth will likely be lower in 2020, moderating future wage growth and consumer spending as a result, says Kuti.

Ultimately, growth in domestic consumption will likely decrease compared to 2019. However, due to high consumer confidence and an uptick in household savings over the last year, this anticipated decline may be smaller than expected.

In recent years, both public and private investment produced considerable economic growth. Public investment was aided by EU funds while private investment was driven by new housing construction and corporate investment. However, total investment is expected to decline in 2020, in response to multiple factors. 

First, public investment growth will be curbed by shrinking availability of EU funds. Second, private investments will likely see a slowdown of a technical nature following an outstanding year in 2019. Despite falling investor confidence, the underlying fundamentals of corporate investment remain favorable and will likely support strong private investment.

The recent partial trade deal between the U.S. and China has not put an end to global trade tensions. Also, a weakening global economy will decrease Hungarian export opportunities in 2020.  Yet, Kuti sees newly built industrial capacities in some export markets (resulting from investments made by multinational companies) as a bright spot that may preserve some Hungarian shares of the global market. 

Following a 5% economic growth rate in 2019, the economy will likely slow down in 2020, however, growth may not decline as much as many expect, says Orsolya Nyeste, senior analyst at Erste Bank.

Economic growth will likely continue to be supported by domestic demand as household spending continues to increase by 4% in 2020.

Moderation in wage growth will likely be minimal and consumer confidence will remain high. An increase in lending may also support growth in private sector consumption. Overall, the analyst expects 3.5% growth in 2020, with some upside risks supported by consumption growing at stronger rate than expected.

Both 2018 and 2019 saw a significant increase in public and private investment, as EU funds reached a peak across these two years. By 2020, however, public investment will be reduced by expected declines in both EU resource inflows and public deficits.

Private investment is a more complicated picture. On the one hand, a relative labor shortage and favorable interest rates may encourage corporate investments to remain strong. On the other hand, a down-swing in the housing cycle may signal a decline in household investments.

Overall, total investment growth may slow to 4%-6% annually. Regarding foreign markets, recession risks on our main export markets appear to be easing.

However, overall growth prospects are still rather subdued, adds Nyeste. While Hungary may not be able to completely shield ourselves from the effects of the global economy in the long term, previously built export capacities are now turning to fruition. As a result, export growth may only slow down slightly compared to 2019 levels, and the contribution of net exports to economic growth may remain neutral in 2020.