Hungary: Economy decelerates in Q4
March 7, 2017
The Hungarian economy shifted into a lower gear as growth slid in the final quarter of 2016. Comprehensive data released by the Central Statistics Office (KSH) show that the economy expanded 1.6% annually in Q4, marking the second consecutive quarterly deceleration and matching the preliminary estimate figure. With Q4’s print, 2016 GDP came in at a four-year low of 2.0% as the economy reeled from dwindling EU investment funds and weakening demand for Hungarian goods. On a seasonally-adjusted quarter-on-quarter basis, GDP remained broadly stable and expanded a soft 0.4% in Q4 (Q3: +0.3% q-o-q).
Abysmal readings in fixed investment and government consumption dented growth in the domestic economy and are largely behind the quarterly deceleration. Fixed investment declined at a double-digit rate in Q4 as EU-investment funds have dried up (Q3: -9.9% year-on-year; Q4: -19.6% yoy) and government consumption plunged to an over nine-year low (Q4: -5.0% year-on-year). The only bright spot was private consumption, which accelerated thanks to cheap credit, growth in real personal disposable income, low unemployment, and strong consumer confidence throughout the whole quarter. Overall, growth in domestic demand slowed from 1.8% in Q3 to 1.1% in Q4.
The contribution of the external sector to growth improved in the final quarter, even though the figure itself is misleading as exports actually slowed from a strong 5.1% expansion in Q3 to 3.1%, an over three-year low. However, imports decelerated even faster and expanded at an almost four-year low of 2.7% in Q4 (Q3: + 5.1% yoy) despite strong private consumption. As growth in imports slowed at a faster rate than exports, the contribution of the external sector improved from 0.1 percentage points in Q3 to 0.5 percentage points in Q4.
The slowdown experienced in the final quarter of the year is not expected to continue this year. A battery of measures announced by the government late last year such as wage hikes, increased spending and tax cuts will support stronger growth and offset domestic challenges such as rising prices. The resumption of EU inflows and the Central Bank’s commitment to maintaining favorable monetary conditions will provide a further boost to the economy. The aforementioned factors should shield the economy from external headwinds such as weaker economic growth in Hungary’s trading partners and its ripple effect on the country’s external sector, as well as monetary policy normalization in the United States and Euro Area, which could trigger capital flow volatility and drive up financing costs.