Hungary’s economic activity to rebound in Q2

Given April’s robust retail sales and industrial output, Hungary’s economic activity is likely to rebound in the second quarter of this year. Also, the activity is expected to gather more momentum in the second half of this year due to bolstering of private consumption as private sector deleveraging has come to an end and the absorption of EU funds has risen, said Danske Bank in a research report.

Hungary’s GDP dropped 0.8 percent in the first quarter of 2016 as compared to the earlier quarter. The decline was because of lower industrial production and an investment slump. Hungary’s FY 2016 real GDP is projected to grow 1.2 percent, while it is expected to grow 3.7 percent in 2017, added Danske Bank.

Meanwhile, the National Bank of Hungary cut its base rate from 1.05 percent to 0.9 percent in May to boost the economic growth in wake of subdued inflation developments. During the meeting, the central bank gave a hint that it is done with easing and is likely to be on hold for some time.

“Given the uptick in economic activity and the rather tight labour market (the unemployment rate was 5.8% in Q1, the lowest level since 2003), we think the NBH will look to raise rates in early 2017,” according to Danske Bank.

In the mean time, the Hungarian forint is likely to trade weakly going into the UK EU referendum. If UK votes to stay in EU, the EUR/HUF pain might bolster to 312 on one month. On a three month horizon, the currency pair is expected to be at 312 as the help from the rebounding growth outlook and confidence in the economy has eased due to concern regarding the probability of US Fed hiking rate in September.

“On the back of the Fed meeting in September, we see the relatively strong external balance and economic growth supporting the HUF towards 310 and 308 versus the EUR on 6M and 12M, respectively,” added Danske Bank.

However, there is a considerable risk on the upside for the currency pair if the UK votes to exit the EU. The pair might trade at 320 in the immediate aftermath.