Hungary’s economy grew just 2% on an annual basis in the third quarter of the year, slowing from 2.8% in the previous quarter, statistics office KSH reported in a flash estimate on November 15. 

The result was largely in line with market expectations. Although economic activity rebounded in the previous quarter after disappointing in the first three months of 2016, the slowdown in Q3 shows that the continued feeble performance of the industrial and construction sectors continues to drag on Hungarian growth.

According to seasonally and calendar adjusted data, Hungary’s economic growth in the third quarter was limited to 1.4% y/y, but increased 0.2% on a quarterly basis. In its estimate, KSH only noted that "the main contributors to the growth rate were market services and agriculture,” while “the performance of industry stagnated and construction went on lowering the increase”. The statistics office will publish detailed data on December 6.

A slowdown in Hungary’s GDP growth matches the regional trend. “Growth weakened across the region, both in y/y and q/q terms. (…) Meanwhile, the data out of Central Europe were particularly disappointing,” analysts at Capital Economics note.

As for Hungary, analysts at OTP lowered their annual GDP growth expectations from 2.3% to 2-2.1%. Erste has similar projections, and expects a peak of 2.8% in 2017.

However, he economy ministry insists it is optimistic over the government's target for 2.5% GDP growth in 2016. “The feeble performance in industry and construction may be explained by temporary effects,” Economy Minister Mihaly Varga said, repeating a mantra he often used in the first half of the year to explain away weak results in the economy. He points out that summer recesses “caused the loss of momentum in the automotive sector,” although output also plummeted in other important subsections of industry in September.

While plans by Mercedes-Benz and Audi to invest a combined €1.1bn in expansion of their local plants between 2016 and 2019 pose upside risk to Hungary’s GDP growth, there is “a huge uncertainty (…) about the pace at which the announced big-ticket investments will appear in the statistics,” OTP notes.

Construction output continued to decline across the first nine months of the year, in a trend provoked by a sharp decline in projects driven by EU funds. A recovery of the construction sector remains unlikely until the pipeline of EU-funded projects starts flowing once more. 

A possible reason for the deceleration of GDP growth in the third quarter is that “EU-funds-related budgetary investments may have accelerated slower in Q3 than we had thought,” the OTP analysts note.

At the same time, the government hopes that construction sector “will receive significant contribution from the expected boom” in the government's housing subsidy programme, Varga noted.

Meanwhile, due to the favourable labour market conditions and accelerating wage growth, household consumption growth is likely to remain strong in the coming months. The government has also recently proposed lowering social contribution levels hoping that could also give a serious boost to the economy next year.

Possible fiscal stimulus from the government's side and further loosening of monetary policy may also support domestic demand, suggests Erste. They add, however, that uncertainties around global growth prospects, stemming from Brexit and the Trump presidency in the US, could negatively affect the performance of the Hungarian economy.