Fast-paced economic growth and a successful fiscal policy have together created manouvering room for economic stimulus: the current, progressive corporate income tax scheme is to be replaced by a flat-rate tax of 9 percent, and parallel to that, the minimum wage is raised significantly and contributions payable on labour are to be reduced.
According to the latest data by the Hungarian Central Statistical Office (KSH), in Q3 2016 Hungary’s GDP grew by 2.0 percent in comparison to the corresponding period of the previous year. The main drivers of growth were the market services and agricultural sectors. Between 2011 and 2015, gross value added produced within the agricultural sector was up by 6.6 percent, HUF 72.83bn, and the number of people employed in the agriculture, forestry and fishing industries gained 10.1 percent, or 18 600. As a parallel development, the sector’s main trade indicator, which gauges the sales volume of Hungarian food, beverages and tobacco products abroad, showed robust trade surpluses in the observed period.
Following an upgrade by Fitch Ratings in May 2016 and by Standard&Poor’s in September 2016, Moody’s Investors Service also revised upward Hungary’s state debt status on 4 November 2016. Thus, after five years in “junk” category, Hungary has been elevated to investment grade by all the three leading international credit rating agencies. Moody’s revised the former Ba1 rating to Baa3, with stable outlook. In light of data released in recent months, analysts had anticipated and welcomed this positive decision, and their expectations are also upbeat concerning the future.
According to export of goods data, the Hungarian foreign trade sector has been dynamically expanding since the middle of 2013. Monthly data show that year-on-year growth ranged between 5-10 percent. In the initial eight months of the year, the Hungarian foreign trade sector posted a surplus of more than EUR 1bn, compared to the same period of the previous year. This constitutes a year-on-year increase of more than 18.7 percent.
Parallel to GDP growth, employment trends have been positive since 2010, thanks also to the Government’s labour market policy and other measures. In July-September 2016, the number of people in employment increased, and the unemployment rate fell to a 30-year low. Wages have also risen in the June-August period (July-September data not available yet), boosting consumer demand. Due to rising employment figures, higher tax revenues and favourable macro-economic data, the Government is weighing options to reduce payroll taxes in order to boost wages and, consequently, the standard of living in Hungary.
The Hungarian Government Debt Management Agency (ÁKK) has recently published favourable data on the situation of the Hungarian government securities market. Hungary’s government debt-to-GDP ratio has been on a descending path since 2011. The share of forex debt has declined to 30 percent of total by 2016 – a massive decrease compared to the near-50 percent figure registered in 2011. Analysts are expecting this indicator to fall to 26 percent by year-end, and that would not be a high proportion even from an international perspective.
According to the latest R&D report by the Hungarian Central Statistical Office (KSH), in 2015 the total volume of expenditure on research and development totalled HUF 468bn (EUR 1.53bn), 1.39 percent of GDP, which constitutes an increase of 6.2 percent compared to data of 2014. While the volume of spending at research facilities at enterprises and budgetary institutions increased, that of tertiary education research bases fell slightly in the observed period.
Real economic GDP growth and labour market data show that Hungary’s performance is solid even from a European perspective. Over the past one year, the overall employment rate among those aged 20-64 years improved by 2.6 percentage points and thus edged closer to the 75 percent level, the EU’s target for 2020. The manufacturing industry repeatedly recorded output volume growth figures above the averages produced by the highly volatile industrial sector of the Euro-zone. The Hungarian economy has been also posting massive foreign trade surpluses: data from the first half of the year show that the volume of exports and imports was up by 8.2 percent and 6.1 percent, respectively, year-on-year.
The latest data compiled by the Hungarian Central Statistical Office (KSH), Eurostat and the National Bank of Hungary (MNB) all signal that the upward trend on the residential property market has gained further momentum. According to a recent analysis by FHB Land Credit and Mortgage Bank Company, in Q1 2016 the bank’s FHB House Price Index showed growth, edging up from 199.93 to 215.06. This implies a quarter-on-quarter price increase of 7.6 percent and 8.8 percent, respectively, in nominal and real terms. It is the largest quarterly growth figure since the onset of the crisis.
Following a similar move by Fitch Ratings in May 2016, Standard & Poor’s has also restored Hungary’s investment grade status. S&P’s has raised the country’s credit rating from the former BB+ with stable outlook to BBB- again with stable outlook. As analysts had expected no change in the rating, this step has taken markets by surprise and triggered some large movements.