2015 may bring solid growth but many risks as well

According to GKI Economic Research, the Hungarian GDP grew by 3.2 percent in 2014 and it will expand by 2 percent in 2015. The world economy and the European Union’s economy are growing a bit slower than expected this year. At the same time decreasing oil prices are good news. After the stagnation in 2013, the European Union’s economy developed by 1.3 percent in 2014 and is expected to improve by 1.5 percent in 2015. In the euro area the growth rate was 0.8 percent in 2014 and it is expected to be 1.1 percent this year. While economic prospects in the European Union worsened a little in the last six months, in Hungary they were at a many-year peak. Hungary’s budget for 2015 reflects the government’s economic policy really well: its main element is keeping the budget deficit down by all means, in order to avoid an excessive deficit procedure and remain eligible to receive EU funding. On the spending side well-founded restructuring of major systems would be absolutely necessary, because in the present system cutting spending is nothing but an austerity measure – and not a transformation – causing serious damages in education and healthcare. In 2015 gross wages will increase by as much as in 2014, with the minimum wage growing by not more than 2 percent (the government forecasts the inflation rate to be around 1.8 percent). GKI’ estimation is that the level of inflation will increase from 0 to 2 percent in 2015; consumption will expand by 1-1.5 percent. It is rather likely that in 2015 Hungary won’t be able to use 5-8 percent of its EU funding – about HUF 400-800 billion. MNB, the Central Bank of Hungary is trying to stimulate the market with a low base rate, the Funding for Growth Scheme and a ‘bad bank’ state asset management fund. Due to the slowing down in both domestic and international demand, in 2015 the dynamics of all sectors will lose momentum. In the retail sector the government is intervening drastically, which may not result in a full market restructuring but does deteriorate the overall quality of the sector and it brings higher prices. The European Commission has already made it clear in three of their reports that there is something wrong with the way Hungary’s public debt develops. For Hungary the ideal scenario would be an average 1-percent reduction of the debt rate every year in each 3-year period. Plus in the transitional period that lasts until 2016 the structural deficit should be reduced as well. Hungary’s Fiscal Council forecasted a 0.9-percentage point improvement in the public debt in 2015. However, this target would only meet Hungarian debt regulations and not the so-called Maastricht debt definition. A European Union forecast, published in November 2014, mentions a rather high, 2.8 structural deficit for Hungary in 2015, which is 1.2 percentage point higher than the government’s 1.6-percent target. In 2015 the external balance has been active but to a lesser extent than before. In 2014 the worsening of the trade balance could be offset by development-aim net EU transfers, but in 2015 the sum of the latter will be reduced from EUR 4 billion to 2 billion. In 2014 practically there was no price increase in Hungary, despite the fact that the 2.1-percent base rate and the 3.5 percent weaker forint should have had an inflation effect. In 2015 a 2-percent inflation level is probable. MNB will try to maintain the current base rate, therefore it may give green light to a rather weak forint: on average 1 euro may cost as much as HUF 320 this year.