Monthly Flash Report For Top Executives In Hungary

The deteriorating growth prospects of the Hungarian economy are in part a consequence of the worsening global economic environment. The Hungarian economy was particularly adversely affected by the dramatic appreciation of the Swiss franc reducing the purchasing power of people due to the growing burden of loan repayment. However, economic policy played an important role as well.

According to data of the second quarter in 2011, it prevented an increase in domestic demand more than previously envisaged. The increase in real wages experienced only by high-income people has not raised consumption, whereas the crisis taxes have curbed the current and investment demand of companies as well as their borrowing options. Deluding those having taken mortgage loans and putting the problems off until later seem to preserve them.

The legal uncertainty and the lack of predictability also played a part in the fact that in the first quarter of the year the outflow of foreign direct investments surpassed the inflow.

Hungarian GDP stagnated in the second quarter of the year compared with the previous quarter, and it was one of the weakest results in the EU. In June Hungarian industrial output was 1.4 per cent lower than a year ago, while it increased by 1.7 per cent in the EU as a whole, despite the significant slowdown. It is alarming that while industrial exports have been the driving force of the Hungarian economy until now, its level has been declining since March compared with the preceding month, and the assessment of orders has also been deteriorating.

The decline of sectors focusing on the domestic market continues, and no changes can be expected in the second half of the year either. Domestic sales of industry have been declining for four years. Retail sales have been going down for five years, and construction has been decreasing for six years. In agriculture, however, the bad harvest of last year will be followed by an excellent one this year, helping GDP, exports, and also dampening inflation.

European industrial confidence indices fell significantly in August. In keeping with the international atmosphere, expectations of Hungarian industrial companies also deteriorated. Expectations of companies in other sectors also fell. The value of the GKI consumer confidence index slightly increased in August (before the strengthening of the Swiss franc) following a steady decline since November 2010 or, especially, since March of this year.

Consumer prices were 0.3 per cent lower in July than a month earlier, thanks to primarily the weakening upward pressure on food prices. According to the survey of GKI plans to increase prices were almost unchanged in all sectors in August.

The Monetary Council left its reference rate on hold (at 6 per cent) in August and according to the projection of GKI it will remain unchanged for a longer period.

In the second quarter of the year the number of employees grew by about 30 thousand, and the number of unemployed decreased by 13 thousand compared with the previous year. This increase was attributable to the competitive sector; however, it is alarming that according to GKI surveys the business sector's intentions to employ has been declining for several months. The number of people participating in public employment decreased, and three quarters of them worked only in part time. Without counting these people, the number of employees in the public sector was stagnating. Unemployment will increase slightly by the end of the year as there are less seasonal jobs in winter. Instead of real changes, in 2012 unemployment will be reduced only on paper.

The sustainability of the general government deficit in 2012 will be really critical, as the amount available this year from using up the assets of private pension funds should be replaced somehow next year, and the problems due to the slow economic growth, whose structure is unfavourable for tax revenues, need to be addressed as well. It is quite likely that the previously planned tax reductions will not be implemented next year. Even in this case, a HUF700bn improvement of the general government balance will be needed.

GKI further reduced its forecast for economic growth. In the first half of 2011 investments decreased by 4 per cent compared with the previous year. Of the major industries only the manufacturing sector indicated some growth, and, in addition to this sector, investments increased only almost exclusively in public services. In other words, the government's plan to boost investments using EU funds has failed.

Retail trade declined further as well. This was caused in part by caution, but in part it was unavoidable as monthly repayments grew further due to the strengthening of the Swiss franc.

With the exception of agriculture and industry, other sectors are stagnating or falling back in 2011. The acceleration compared to 2010 will be essentially due to the good agricultural harvest. Household consumption will not increase over the previous year. The exchange rate of the Swiss franc to the forint assumed at HUF230-HUF240 will consume around 2 per cent of household incomes, which equals to the real yields of private pension funds. Investments will decrease. The rate of GDP growth will be around 1.7 per cent.

In 2012 construction will not fall further, and industrial production will slightly increase as a result of the starting operation of new car factories, despite the weakening general economic activity. However, agriculture will only stagnate. Household consumption will not rise, because repayments and the expected further cuts will consume further portions of incomes. Investments will increase modestly.

Inflation will be around 3.8 per cent in 2011 as a result of subdued consumer demand, favourable agricultural prices and frozen public utility prices. The planned government cuts may accelerate the rate of inflation. The additional increase of energy and utility prices delayed in 2011 will also generate inflation. Thus, in 2012 the rate of inflation will be largely determined by political decisions.

Market developments would justify only very modest price increases, since the demand of households has been decreasing year by year, therefore it is impossible to raise market prices. The rate of inflation in 2012 will be around 3.5 per cent, without dramatic government intervention."

Source: GKI Economic Research Co.