Economic Analysis - Economy Entering A Cyclical Upswing - SEPT 2017

BMI View: Hungary ' s solid Q117 GDP figures add weight to our call for economic growth t o rebound over the coming years. An uptic k in EU structural funding is likely to see fixed investment accelerate, while a positive picture across domestic equities and an i mproving outlook for the corporate sector should precipitate higher levels of capital expenditure . Strengthening external demand should also be supportive of growth.

Economic growth in Hungary surprised consensus to the upside in Q117, adding weight to our call for economic growth to rebound over the coming years. Real GDP growth slowed significantly to 2.0% y-o-y in 2016, before accelerating to 4.1% in the first quarter of 2017. Leading indicators for Hungary - including the European Commission's economic sentiment indicator - generally remain near multi-year highs, suggesting that economic activity is set to remain robust over the coming months. We should note that the strong Q117 GDP growth reading was due in part to base effects - the growth rate in the same quarter the previous year was extremely weak - meaning growth is unlikely to be as strong in subsequent quarters. In line with this, we expect real GDP growth to come in at 3.2% and 2.8% in 2017 and 2018 respectively, from 2.0% in 2016.

Our call for fixed investment to rebound in 2017 - following a significant contraction the previous year - is clearly playing out, and we expect both private and public sector investment to continue recovering over the coming years, underpinning our view for robust economic growth. In particular, rising disbursements from EU structural funds in all likelihood will lead to higher levels of public investment in Hungary, predominately concentrated in the construction sector, with output in the latter growing by 22.2% y-o-y in April. Hungary is set to receive EUR25bn (23.0% of GDP) in EU cohesion funding over the 2014-2020 funding period, although we caution that Hungary's traditionally sluggish absorption rate will result in a highly uneven pattern of investment that is likely to be concentrated towards the end of the period.

Growth Beating Consensus
Real GDP, % chg y-o-y
Source: Eurostat, BMI

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