Economic overview – ESTON analysis 2010/1

The productivity of the Hungarian economy hit bottom in the 2nd-3rd quarter of 2009. The aggregate figure is expected to be slightly better however, as a 6.3% decline in GDP is likely, based on analysts’ projections for 2009 as a whole.

The following period is supposed to be accompanied by positive trends, mainly due to the favourable effects of the international financial markets and the gradual global economic recovery, which is also supported by forecasts that project a more moderate decline (-0.6%) in GDP by 2010.

The prognosticated GDP of all the members of the European Union for 2009 is around -4.1%, while a 0.7% growth is expected for 2010.

Domestic inflation also tended to abate as a result of steady economic recession; therefore prices were 4.2% higher on average in 2009 than in the same period of the previous year. The combined effects of the VAT rate that has increased to 25% from July 1st, the increased excise duties and certain restrictions in price support – considering the price-dampening influence of the introduction of the 18% special VAT rate as well – all tended to augment the yearly average inflation rate nearly by 1 percentage point, according to the Ministry of Finance.

As for the GDP-proportionate state debt, no further increase in deficit is expected to accompany the economic downturn in 2010; analysts visualize a real chance for complying with the targeted 3.9% ESA, since the 2009 cash-basis fiscal deficit
-exclusive of local authorities – amounts to 3.6% of GDP. In connection with the above, the Government’s expectations for 2010 have not changed, and still render a deficit of 3.8% for the end of the year.

The judgement of the country from abroad has been improved significantly: Standard and Poor’s also acknowledged this progress by raising Hungary’s rating outlook in October from negative to stable.

As another positive sign, there is abundant liquidity (again) in the banking system, as a result of amounts of equity pumped into the economy by central banks, from which Hungary could benefit as well.

The government started several programs last year in order to preserve existing jobs and thus decrease unemployment. At the end of the year, the unemployment rate in Hungary was 10.5%, while 9.5% in the EU. From enterprise point of view, the sector’s investment activity still seems to be moderate, while government investments keep construction busy with infrastructural developments.

The fall-back of industrial production volume could further moderate in 2010, due to improving export prospects. The industrial volume in 2009 as a whole was 17.7% lower than in the previous year. Within this, the division of construction of
buildings showed decreasing, while the division of civil engineering works showed an increasing tendency – due to road and railway construction works – compared with 2008.

The decline in market services abated – in fact the volume of financial activities, real estate affairs and economic services showed a slight increase (1.2%).

The exchange rate of the forint was stable and averaged 271.09 HUF/EUR in the second half of the year. During that period, the forint fluctuated between 264.17 and 279.13 HUF/EUR.

In contrary to the silent interest rate decisions in the first two quarters, the Hungarian National Bank (MNB) has decided to cut the rate monthly in the second half of the year. The rate was gradually cut by 50 base points until November, and further
25 base points cut was carried out in December to leave the rate at 6.25%.