Hungary: Hungarian economy recovers in Q2 proving resilient to plunging fixed investment
September 6, 2016
Hungary’s economy regained traction in Q2, proving resilient to an unprecedented decline in fixed investment over fading EU funding and recovering some of the ground lost in Q1. GDP expanded 2.6% annually in Q2, according to detailed data released by the Central Statistics Office (KSH), marking a considerable pickup over Q1’s four-year low of 1.1% and confirming a previous flash estimate. A remarkable rebound in the external sector, which partly resulted from a recovery in the vehicle industry, and buoyant private consumption drove the acceleration and helped to overcome weakness in fixed investment.
On the domestic side of the economy, private consumption was the main growth engine as households’ purchasing power was boosted by falling consumer prices, record-low unemployment and rising wages. Monetary and fiscal stimulus also supported household spending. All these factors pushed growth in private consumption up to an annual 4.6%, the fastest expansion in more than a decade (Q1: +4.0% year-on-year). Conversely, growth in public spending slowed from Q1’s 5.0% to 2.8% in Q2. Fixed investment continued to deteriorate and Q2’s sharp 20.0% contraction (Q1: -7.8% yoy) shows how much construction projects and fixed investment, which had been an important pillar of growth in recent years, have been suffering from diminished availability of EU development funds since the beginning of this year.
A drastic improvement in the external sector contributed considerably to overall GDP growth. A recovery in exports was the main driver of the external sector’s better performance. Following Q1’s dismal 5.7% expansion, which had marked the slowest pace of growth in four years, exports regained momentum and grew 8.2% in Q2. A normalization in Hungary’s key auto industry, which in Q1 had suffered from production stoppages, coupled with solid production in several other branches of industrial activity enabled the turnaround in exports. A moderation in imports also increased the value of net exports in Q2. In fact, imports recorded the smallest expansion in over four years, increasing 6.1% (Q1: +7.8% yoy). As a result, the external sector contributed 2.3 percentage points to overall GDP growth in Q2, while it had deducted 2.1 percentage points from growth in Q1.
Sequential data confirm that Q1’s dip was temporary: on a quarter-on-quarter basis, GDP expanded a seasonally-adjusted 1.0% in Q2, which contrasted the 0.5% decrease recorded in Q1. Overall, Q2’s GDP data underline expectations that growth this year will fall short of last year’s outstanding result as EU funding dries up. Healthy private consumption, which is benefitting from a buoyant labor market and fiscal and monetary stimulus, will nonetheless still support a robust expansion.