Hungary: Growth in Q2 Provides Glimmer of Optimism

LACF Chart

Despite a high dependence on foreign investment, Hungary repaid its emergency 2008 IMF loan in full last month, almost a year ahead of schedule. Besides a reduction in interest payments, the move was partly seen as political as Prime Minister Victor Orban seeks to reduce foreign influence over his economic policies. After growth of 0.7% (q-o-q) in Q1, Q2 data showed a much less positive trend, with an increase in GDP of only 0.1%. Agriculture and construction were the key drivers of the economy, the latter almost purely due to public infrastructure projects. Household consumption rose to 0.3% (y-o-y) in Q2, while capital formation rebounded 8.7%, its first annual increase in eighteen quarters. Inflation was only 1.3% (y-o-y) in August (bottom box), providing scope for the National Bank to cut rates to 3.8% to spur growth.

The government faces significant challenges to revive domestic demand and protect the recovery momentum, as it heads towards elections in 2014. The European Commission had put a temporary hold on certain payments to Hungary from the EU Structural Funds, due to alleged financial irregularities. An agreement was reached in early September for the transfers to restart, but relations between the two parties remain uneasy.

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