Hungarian economic growth probably slowed in the Q3

The economy probably grew an annual 3.6%, the slowest pace since the first three months of 2005, compared with 3.8% in the previous quarter, according to the median estimate of nine economists in a Bloomberg News survey. Prime Minister Ferenc Gyurcsány’s government has raised taxes and cut subsidies to bring down the deficit, deterring investors and crimping household demand. Consumer confidence has declined and foreign companies including Volkswagen AG, Europe's biggest carmaker, have said they'll reduce spending in the country. „It's because of the government's fiscal austerity program and its negative impact,” said Iwona Pugacewicz-Kowalska, an economist at Citigroup Inc. in Warsaw. „Big companies enjoyed a tax holiday and were surprised by a new tax. Less disposable income for households negatively affects consumption.” Hungary's economic growth, the slowest in eastern Europe, is set to lose more speed next year. The government estimates next year's rate will be 2.2%, the slowest in a decade.

The pace of expansion lags behind other nations that joined the EU in 2004. Slovakia's economy grew 6.7% in the Q2, Czech GDP rose 6.2% and Polish GDP was up 5.5% in the same period. „It can only turn worse in terms of growth,” said Lars Christensen, an analyst at Danske Bank S/A in Copenhagen. „Either the government moves ahead with the reforms that would implement a significantly tighter fiscal policy that would mean a slowdown in domestic growth. And if they don't, then we will have financial turmoil that will have the same impact.” Gyurcsány pledged to narrow the budget shortfall in the face of threats that the EU would cut off aid. Monetary Affairs Commissioner Joaquin Almunia on October 10 issued a final warning to the government to comply with the bloc's fiscal regulations. The EU's procedures for halting aid are in place and the commission „can't ignore” that possibility, should Hungary fail to deliver on its budget plans, Almunia said during a visit to Hungary on November 8. At stake is €8 billion ($10.3 billion) for motorways, railroads, schools and hospitals.

The budget deficit, which has exceeded the government's target every year since 2001, also forced Gyurcsány to abandon a plan to adopt the euro in 2010. The government says it will slash the shortfall to near the EU's limits by 2009, allowing it to switch currencies two years later. Volkswagen's Audi luxury car unit, Hungary's biggest exporter, threatened to stop spending because of the new 4% tax on corporate profits. „We suspended our future investments in Hungary because unfavorable economic conditions are putting additional burdens on the company,” Audi spokeswoman Monika Czechmeister said on October 20 in a phone interview from Győr, western Hungary, where the company makes the TT Coupe sports car and engines. The carmaker, which was previously granted tax exemption through 2011, forced the government to make research spending deductible. Hungary has benefited from an influx of more than $65 billion of foreign direct investment since the collapse of communism 17 years ago.

The country now relies on exports from the local units of foreign companies and domestic manufacturers such as drugmaker Gedeon Richter Nyrt and plastics manufacturer BorsodChem Nyrt to drive economic growth. Their output helped keep growth rates above the EU average while consumer demand fell, analysts said. „Net exports were the main driver of growth, even stronger than in the Q2,” said Pugacewicz-Kowalska. Industrial production was an average 10.9% higher in the Q3 than in the same period last year, accelerating from 8.7% in the Q2. Taxes also rose for consumers, including an increase in the value-added tax rate that sapped disposable incomes. Spending power was further weakened when the government raised the price of products such as electricity, natural gas and medicines. Consumer confidence fell to minus 51.1 in September, the second-lowest level on record, surpassed only by a minus 51.5 mark in June 1996 that followed an austerity package. (Bloomberg)