The View 9

9

HIGH INFLATION, WEAK CURRENCY

Based on Oxford Economics, Hungary will remain the fastest growing economy in the EU in 2020 and 2021 with 3.5% p.a. GDP growth expected for the coming years. Although this is a marked deceleration from 4.9% last year - it is confidently above the 1.1% forecasted for the Eurozone in 2020. This high economic growth is expected to hinge on persistently high investment growth, amoderation in the domestic consumption, and a very disciplined governmental spending - relying on EU funds available until 2022. Although the domestic-driven growth is mostly understood as increasing domestic consumption, the Hungarian economy has also been strongly influenced by expansion in investment activity as manufacturers and service providers expanded their facilities and equipment - reflecting a strong commitment to future business here in Hungary. Investment-to-GDP ratio has been among the highest in Europe (29%), while government spending remained modest at 2% of the GDP. The external leg was relatively weak in 2019 with an export growthof 4%only. Thiswas expected to increase again in line with expected economic improvement in major European countries. Unfortunately, the coronavirus epidemic and its economic implications are likely to hit global economic performance hard in Q1 and mitigate expectations for Q2. This can prolong the recovery of the Hungarian export market.

Consumer price inflation reached a new peak in the cycle with 4.7% reported for January 2020. This is the highest figure currently in the EU and is higher than previously expected. The extent of this improvement; however, is somewhat surprising given the continuing wage dynamics, strong domestic demand and the weaker currency. Many businesses adjust their pricing policies in January - therefore this jump in the inflationary rate can be seen as a natural outcome of higher inflation and weaker currency seen in previous months. That said, MNB expects a clear deceleration in the inflation under 4% as of mid-2020. If this does not happen, MNB by law must intervene in order to moderate CPI. They have clearly articulated their intent do so if figures in coming months continue to disappoint. Interestingly the rental price increase was still above 10% y/y in January, while service prices in general went up by only 3.6% y/y. Besides inflation, many businesses are also concerned about the quick deprecation of the HUF. While Hungary has one of the highest GDP growth in the EU and likely to keep this pace ahead of the rest of

GDP Growth in Selected EU Countries

Source: Oxford Economics