Hungarian gov't chooses austerity measures it was seeking to avoid
Thursday, 07 July 2011 15:08
While the key indicators of the Hungarian economy are improving as the global crisis is letting up, the real situation is not better than it was when the current cabinet took power in the spring of 2010, said local think tank GKI in its latest research note. The external business cycle has been somewhat more favourable than expected, and while the decline in domestic demand has ended, no pickup should be expected in it before the second half of the year. The right-of-centre Fidesz-led government was forced to announce such serious austerity measures that it wanted to avoid over the past year and which it was opposing while it was in opposition, the GKI added. It noted that the announced reform plans planted cautious optimism in foreign investors and a great concerns in those who would be affected by them.
The research institute expects the Hungarian economy to expand by about 2.5% in 2011, saying a humble growth in investments and consumption will be able to offset a moderate deceleration in export growth. The central bank (NBH) has recently lowered its GDP growth estimates to 2.6% (from 2.9%) for this year and to 2.7% (from 3.0%) for 2012. The International Monetary Fund (IMF) projects the country’s economic output to increase by 2.6% this year and by 2.5% in 2012. According to the Organisation for Economic Growth and Development (OECD), the Hungarian economy will grow by 2.7% this year and 3.1% next. The government has the most upbeat growth projections of all.
The GKI noted that the construction sector has been in recession for the sixth consecutive year now, but the extent of the contraction will be smaller than in 2010. "Languid domestic demand causes a ripple effect in sales and financing in the Hungarian economy, especially in the SME sector among those companies that have managed to stay afloat so far. After a two-year decline, investments are to show hardly more than stagnation, and grow by 1%," the think tank projects. It believes the only dynamically growing sector will be manufacturing, and within that the car industry that is leaning on foreign capital. The GKI noted that while the rate of employment rose 0.4 percentage point in March-May, the jobless rate dropped by just as much to 11%.
Income differences will grow. Households’ real income (including the payment of real yields by private pension funds) will rise by about 2%, while households’ purchased consumption will increase by only 1.5%, the GKI projects. The monthly loan repayments are high and the uncertain future spurs households to go easy on spending and rather save up. Extra income is generated mostly among high-earners and they choose saving over spending, it explained.