The Hungarian economy is projected to grow by 2.1% in 2014, speeding up from 1.1% estimated for 2013, the European Commission said in the winter edition of its European Economic Forecast, revising up its previous estimate for a 1.8% y/y growth. The annual GDP growth rate is expected to remain unchanged at 2.1% in 2015, the same as projected in November.

Risks, associated with the projections are overall tilted to the downside, the EC said. A tightening in global monetary conditions may generate significant headwinds for Hungary, most notably through the revaluation of FX denominated debt. As regards to domestic factors, the possible adoption of a new comprehensive FX relief scheme with may have potential negative effects on the banking sector and investors’ sentiment.

Domestic demand is expected to be the main driver of growth as it will contribute 2.2pps to GDP growth in 2014, up from 0.4pps last year. Households’ consumption is expected to return to positive territory from 2014 due to further improvements in real disposable income, partly linked to the regulated price cuts and increasing public sector wages, but also looser lending conditions as a consequence of new subsidised mortgage schemes. Net exports will have a negative 0.1pps contribution to the GDP growth in 2014, reversing from a positive 0.4pps in 2013. Imports growth will speed up to 5.9% y/y this year from 5% y/y in 2013. At the same time exports are projected to increase at a slower pace, by 5.3% y/y, up from 5.1% y/y in 2013. 

Hungary’s inflation is expected to slow down to 1.2% y/y in 2014 from 1.7% y/y in 2013, reflecting cuts in regulated energy and other utility prices. However, as the output gap closes and the effect of utility price cuts fades away, inflation is expected to increase gradually towards the central bank's 3% target by 2015.

The EC projects the unemployment rate in the country to decrease to 9.6% in 2014 from 10.2% last year, while the employment is expected to pick up by 0.6% y/y in 2014. This improvement on the labour market could be mainly attributed to economy recovery.

Referring to fiscal policy, the EC said Hungary overachieved its 2013 deficit target posting a gap of 2.4% of GDP, below the government's plan of 2.9%. The budget deficit is expected to increase to 3% of GDP in 2014, or slightly above the government’s target of 2.9% of GDP.