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Hungarian GDP Growth Forecast Takes Another Battering

MNB

Hungarian Prime Minister Viktor Orbán has repeatedly affirmed his commitment to reducing the debt to GDP ratio; however, the plan in place was hinged on an annual growth rate of 3% over the 2010 annum. These changes in the economic landscape of Hungary spell a missing HUF 100 billion which will have to be made up elsewhere if Organ is as committed as he appears in reducing the budget deficit to 2.94%. Coming up with HUF 100 billion in an economy which has the second lowest employment rate in the EU – 27 and has already cut out a pillar of its pension fund to finance it seems hard to fathom. The future of the GDP growth rate is a critical element to bringing Orban’s plan to fruition.

Several factors play a part in the change of fortunes for the national figure of the Hungarian GDP; however, Orbán estimates that the turn of tides shan’t knock the country off track in getting below a 3% debt to GDP ratio. Orbán's stance toward reaching the debt to GDP ratio goal is rock solid, nearly nothing, not even a percentage point GDP downturn can shake it. The question remains in how Hungary will manage this if growth does not improve?

On May 16, the GDP growth rate for 2011 was revised down from 3% to 2.6%, as data about the year showed less promising news. Hungarian economist Zoltan Arokszallasi estimated an annual growth rate of 2.7% for the 2011 year, based on similar data and trends available at that time. The economic fortunes in the second quarter, however, were hindered due to larger forces that played their hand in the Hungarian game.

The German Wallet

The January to March growth rate reached a robust 2.4%, helped out by the 1.3% expansion of the Eurozone’s largest economy, Germany. 60% of products made or assembled in Hungary are bound for Germany, thus a downturn or an upswing of the EU powerhouse resonates heavily in the Hungarian economy. Despite the increase in exports during the January to March period, domestic demand was holding the Hungarian economy back, according to Arokszallasi from Erste Bank AG. This information lead some analysts to conclude that the 2.7% GDP growth could be achieved by year-end, and although this figure would be slightly lower than previously expected, it wouldn’t necessitate such a significant recalculation of the country’s financial planner, if it held at 2.7%.

Unfortunately, the original forecast was again revised, and once more the news was not good for the original agenda. Largely due to international economic forces, the Hungarian exports took a hit when German economic data released on August 16 showing a near flat-line in growth. France’s fate was similar for the second-quarter time frame, and the news bode badly for the smaller players on the European economic table, Hungary for one. The strength of German exports were largely maintained, however, consumer spending was reduced significantly. Were German consumers less resistant to spending, a larger demand for the Hungarian imports may very well have made the difference in the export dependent Hungarian economy.

Long – Term Concerns

“Exports and industrial production were undoubtedly the engine of growth,” government statistician Peter Szabo said. Growth in Hungary depends so heavily on the ability to produce or assemble goods that can be bought or made in Germany, else a new market should need to be found. These factors lead many to see some very deep concerns in the longer-term economic outlook, primarily due to the lack of ability to produce. Hungary’s employment rate is extremely low, the second lowest in the EU – 27, so the ability to produce the goods that are exported abroad is hardly available even if there was a demand. Anthony Thomas, a risk analyst at Moody’s Investors Service warned that the low employment rate, compounded by an aging and shrinking population would spell serious future concerns for productivity.

Viktor Orbán has said that the ability to reduce the deficit to sub – 3% of GDP levels will be reached, despite any shortcomings in GDP growth rates - or other setbacks for that matter. If the growth rate does not improve, then this means additional budget cuts or tax increases that will likely be controversial.

Orbán and the center-right Fidesz party have made multiple steps, which reinforce this effort to reduce the debt. If the debt level is brought down, Hungary will be able to meet the EU requirement for the GDP to debt ratio that many member states are currently struggling with. Some international analysts have argued that this may only make larger concerns more difficult to see if Hungarian policy makers focus too closely on the tree and not the forest. Viktor Orbán need keep two eyes on the long term and two more on the short, all the while cutting the fat off the right places. 

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