The European Commission raised its projections for Hungary’s GDP this year and next to 4.3 percent and 3.4 percent, respectively, in a biannual forecast released on Thursday.
The EC raised the projection for 2018 from 4.0 percent and the one for 2019 from 3.2 percent in a forecast published in the spring.
From this year, the EC reverted to publishing two comprehensive forecasts, in the spring and the autumn, and two interim forecasts, in the winter and summer.
The official government forecasts for GDP growth are 4.3 percent for 2018 and 3.8 percent for 2019.
Hungary’s GDP growth in H1 2018 reached 4.7 percent, the latest data from the Central Statistical Office (KSH) show.
The EC forecasts Hungary’s GDP growth will slow to 2.6 percent in 2020.
The EC said economic growth in 2018 is “broad-based”, while noting the support of pro-cyclical fiscal and monetary policy. It attributed the expected slowdown in growth in the following two years to a slowdown in investment growth resulting from capacity constraints in the construction sector, evidenced already by higher building costs.
The European Commission projects gross fixed capital formation will slow from 12.5 percent in 2018 to 9.4 percent in 2019 and just 1.0 percent in 2020, noting the impact on residential investment of the reversion of the preferential VAT rate on home construction to the main 27 percent rate from the start of 2020.
Hungary’s government announced on Wednesday, a few weeks after the cut-off date for policy assumptions in the EC’s Autumn Forecast, that it would propose a grandfather provision allowing the continued application of the preferential 5 percent VAT rate on home construction to projects for which builders already have a permit or a registration.
Household consumption growth is seen falling from 5.2 percent in 2018 to 3.3 percent in 2019 and 3.2 percent in 2020 as employment growth slows and the impact of minimum wage increases fades, the EC said.
The EC said risks to its forecast are “balanced” as the tight labour market could sustain real wage growth, leading to faster consumption growth, while downside risks are presented by the evolution of international trade because of Hungary’s strong integration with global value chains.
The EC sees Hungary’s budget deficit as a percentage of GDP narrowing from 2.4 percent in 2018 to 1.9 percent in 2019 and 1.8 percent in 2020.
Capacity restraints could slow the execution of public investments planned in 2018-2019, leading to cost inflation and leaving the overall impact on the deficit uncertain, the EC said.