Hungary’s economy will rise at a faster pace than previously anticipated, 3.9% this year and 3.6% in 2018, according to the semi-annual economic report of the OECD, which revised the projections from 3.8% and 3.4% respectively.
In its latest economic outlook, the OECD said economic growth will continue to rely on strong domestic demand. The robust expansion of private consumption continues due to gains in employment and the double-digit increase in real wages. The OECD projects domestic demand to rise 6.3% in 2017 and 5.6% in 2018. Higher domestic demand will lead to an increase in imports, narrowing the current account surplus significantly, it added.
Hungary's inflation will moderate to 2.2% in October partly on the back of lower energy prices, while core inflation has core inflation has stabilised at 2%. The OECD sees inflation accelerating to 3.4% in 2019 from 2.7% in 2018.
The OECD warned that rising wages are expected to harm cost competitiveness and increasingly constrain exports. To alloy these fears and preserve external competitiveness, the government reduced employers' social security contributions from 27% to 22% in January, with had an associated fiscal cost impact of 1% of GDP.
The fiscal policy stand will loosen further next year, with reductions in employers social security contributions to 19.5% and increases in public spending. Ahead of the April general election, the government is expected to boost expenditures on key policy issues such as housing subsidies and family tax benefits, which will lead to a widening of the structural deficit. However, this will not endanger the Maastricht-based deficit targets as the gap will widen to 2.7% in 2018 from 2.4% in 2017. State debt is projected to drop to 68.4% from 70% in the same period.
Touching on the financial sector, the OECD said banks have become more robust and profitable, although they still incur relatively high operating costs. Despite major improvements, the stock of non-performing loans needs to be further reduced. Having a more competitive and efficient banking sector would lower operating costs and facilitate the conversion of non-performing loans through market-based burden sharing between debtors and creditors.