BUDAPEST: The European Commission projects Hungary’s economy will grow by 2.1 percent this year and 2.5 percent next year in a winter economic forecast for all European Union member states released on Thursday.
The projection for this year was lowered slightly from 2.2 percent in the previous EC forecast released early last November. The fresh projection is under the government’s official target of 2.5 percent growth this year. Growth this year is set to slow from an estimated 2.7 percent in 2015 because of a decline in the absorption of EU funding and a slowdown in external demand, the EC said, adding that partial compensation should come from a more than 3 percent increase in private consumption.
Household spending should be boosted by a reduction in the personal income tax rate from 16 percent to 15 percent and the effect of an earlier government measure to convert retail foreign currency loans into forints, the EC explained.
The EC said consumption should “remain robust” in 2017, driving growth. A reduction in the bank levy and new central bank policies providing subsidised lending to SMEs should create a “friendlier lending environment”, while a reduction in the VAT rate for home construction gives impetus to the home market, it added.
Throughout the forecast horizon, households’ precautionary savings attitude is set to decrease, the EC noted. The forecast puts consumer price inflation at 1.7 percent in 2016 and 2.5 percent in 2017. Lower-than-expected oil prices, subdued imported inflation and low food prices are likely to keep CPI under the central bank’s 3 percent mid-term “price stability” target until the end of 2017, according to the forecast.
The EC projects the budget deficit will be 2.0 percent of GDP this year, in line with the government’s official target. It sees the gap narrowing to 1.9 percent next year. This year, lower spending on interest, savings on co-financing for EU-funded projects and “contained” expenditures on social payments and operating costs are expected to counterbalance the impact of tax cuts — amounting to 0.7 percent of GDP — as well as a new home purchase subsidy scheme, the EC said. The forecast puts Hungary’s public debt as a percentage of GDP on a declining path, amounting to 74.3 percent at the end of 2016 and 72.4 percent at the end of 2017.
