Local growth slowdown expected to persist, fiscal measures, higher oil prices to halt disinflation, analysis

Fiscal risks are significant and further measures are needed to bring the budget deficit to the 3% target by 2024.

According to OTP Bank analysts, the local economy is experiencing weaker growth than previously anticipated. This slowdown is attributed to challenges in the industry and services sectors, fiscal consolidation, and a weakening activity in the euro area. The forecast for the second half of the year is thus influenced by recent international economic developments, the euro zone trends, the new local tax increases and the evolution of local macroeconomic indicators.

Although in the first part of the year the annual GDP was estimated to reach close to 3% increase in 2023, the growth was slower, hindered by weaker consumption and exports amid real incomes eroded by inflation and the deteriorating global manufacturing situation, and reached just 1,7% at half year. As it follows, the prospect for the fully year is around 1,9% economic growth. At the same time, inflation continues to decline and is on track to reach a around 7,5% at the end of December, while for the benchmark interest rate there will be no new developments, as the NBR will hold the current rate.

The first semester GDP performance was fuelled by IT, and construction sectors, and professional services, while the industry, which contributes for more than 20% of the GDP formation had a negative contribution. The HORECA sector had a good start in Q1 but experienced a severe slowdown in Q2. Beginning 2024, the GDP growth trend will improve towards an estimated annual +2,7%, driven by household expenditures (driven by higher real wages), increase in public consumption and a comeback in the export’s dynamics.

“Considering last month’s evolutions, Q3 indicators suggest now growth slowdown will be more prolonged than anticipated. The little development we have seen so far is driven by household demand, a good comeback of the construction sector and a huge increase in investment expenses, out of which a large part is financed from non-reimbursable external funds. Expectation should be reserved for the end of this year, considering expenditures will be limited by the fact that loan growth has also continued to weaken, even though loan generation returned to previous trends for the consumer and corporate segments.” reported OTP Bank analysts.

Inflation has been on a steady decline starting February 2023 and reached 8,8% in September. The decrease is expected to continue until the end of the year, mainly under the influence of base effects and in particular, the price correction of food prices, factoring in the agricultural harvest input of 2023 and the basic food products commercial capping.

“Right now, inflation is still declining, but we should be aware of the fact that January will bring a temporary turnback in disinflation, on account of the fiscal measures implemented for the fiscal consolidation. The higher oil prices effect will also contribute to halting disinflation in the first quarter of next year. Our forecast shows that service price and goods inflation will remain relatively stubborn, while food price inflation will continue to decrease.”

In the European context, the ECB has warned that markets must expect higher interest rates for a longer time, leaving open the possibility of further hikes if inflation rises strongly again. Considering the local disinflation expectations for the beginning of 2024, it is not likely that the National Bank will begin reducing the reference rate.

“The NBR has been carefully watching the inflation/benchmark rate balance throughout the year, trying not to hinder the local business environment efforts while forcing inflation as low as possible. Future developments would demand continuing this tight control, and given a temporary halt in disinflation, the central bank could keep the rate at the current level until the second half next year”.

Though the economic performance has slowed down, the labour market has remained robust until now, with employment picking up slowly but steady. Labor market tightness indicators show no signs of easing. In this time, real wages have managed to rise sharply as inflation decreased, and wages will be further fueled by minimum wage hikes in 2024.

2024budget deficitDGPdisinflationfiscal risksgrowthhigher oil priceslabour marketotp bankslowdowntargetwages
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