Hungarian Economy Unexpectedly Shrinks as EU Funding Dries Up

Hungary’s economy unexpectedly had its first quarterly contraction in four years after a plunge in European Union funding. The forint dropped to a four-month low against the euro.

Gross domestic product shrank 0.8 percent in January-March from the fourth quarter after a 0.6 percent gain in the previous three months, the Budapest-based statistics office said in a report on Friday based on preliminary data. The median of five estimates in a Bloomberg survey was for an increase of 0.4 percent. Growth was 0.9 percent from a year earlier, the slowest since 2013.

“Construction plunged by almost 30 percent as EU funds dried up,” cutting government orders that had buoyed the sector, statistician Zsuzsanna Boros told reporters. In addition, car manufacturers also cut production, she said.

The downswing is exposing the weakness of policies championed by Prime Minister Viktor Orban, who regularly touts Hungary and eastern Europe as the continent’s growth engine and has questioned his western neighbors’ approach to escaping economic stagnation. In Hungary, growth is sputtering after a drop in EU funding, which accounted for almost all public investments in the former communist nation.

The forint was down 0.2 percent to 315.98 versus euro at 9:25 a.m. in Budapest after touching a four-month low following the publication of the GDP data.

“Household spending has likely remained fairly stable, though today’s release suggests that it was weaker than retail sales prints had suggested,” Marcin Kujawski, a Warsaw-based economist at BNP Paribas SA, said in an e-mailed report. “We expect the pattern of poor capital spending and decent private consumption to continue in the quarters to come.”

--With assistance from Kristian Siedenburg To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net. To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net, Paul Abelsky, Andras Gergely