Hungary: Hungarian economy slows markedly in Q1 on lower EU funding and auto sector weakness
June 7, 2016
Hungary’s economy shifted into a lower gear at the outset of the year. While Hungary was among the EU’s fastest-growing economies in recent years—driven by strong monetary and fiscal stimulus along with solid EU funding—Q1’s slump came on the back of decreased EU funding and weakness in the automotive sector. GDP growth decelerated notably from an annual 3.2% in Q4 2015 to a lackluster 0.9% in Q1 2016, according to detailed data released by the Central Statistics Office (KSH), which confirmed a previously reported flash estimate.
Q1’s sharp downturn largely reflects that a decrease in EU development funds—which had been an important pillar of growth in recent years—caused fixed investment to plunge markedly. Particularly, fixed investment swung from a 6.5% annual expansion in Q4 to a 7.8% drop in Q1, marking the largest fall in over four years. The phasing out of EU funding hit construction particularly hard and caused the sector to shrink 28.0% in Q1. Meanwhile, public spending slowed, but remained resilient, with growth decelerating from Q4’s robust 6.7% to 3.4%. Conversely, private consumption was a bright spot in Q1, with growth picking up to a ten-year high of 4.0% (Q4: +3.2% year-on-year) on the back of low inflation and loose monetary policy.
A poorer performance of the external sector also was a significant drag on growth. The main contributor to the external sector’s worse performance was the continued weakening of exports; they recorded the slowest expansion in nearly four years and grew only 5.7% (Q4: +7.7% yoy). Weakness in the country’s key automotive sector was largely behind lackluster exports. Imports decelerated to a lesser extent, rising 7.8% (Q4: +8.0% yoy). As a result, the external sector deducted 2.1 percentage points from overall GDP growth in Q1. Q4’s deduction had been significantly smaller at 0.3 percentage points.
On a quarter-on-quarter basis, GDP contracted a seasonally-adjusted 0.8% in Q1, which contrasted the 0.6% increase recorded in Q4 and marked the lowest reading in four years.