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GKI - investor confidence improving in spite of rising inflation

Analysis

Investor confidence is starting to improve and the forint is strengthening - in spite of rising inflation - as Hungary's deficit narrows, according to the latest prognosis by economic think tank GKI, prepared with Erste bank.

GKI noted that the results of government austerity measures would first be seen in 2007. Government measures to reduce the deficit will result in lower in-kind contributions, public consumption and state investments, with the exception of motorway construction, according to GKI. GKI estimates Hungary's economy expanded almost 4.1% in 2006 after 4.2% last year. Consumption was up 1.5% and investments increased 2%. The industrial sector expanded at a rapid pace, but the construction sector contracted, albeit compared to a high base.

GKI pointed out that personal consumption slowed down and investment volume had fallen in Q2 and Q3. Exports rose markedly in 2006, increasing some 5% points faster than imports. Consequently domestic utilization expanded at a slower pace than the economy as a whole. In 2006 Hungary's terms of traded deteriorated 2%. Hungary's current account deficit will remain about the same in 2006 as in 2005, GKI said. While the trade deficit has narrowed and EU funding has increased, profit repatriation has also grown. GKI stressed that much of foreign-owned companies' profits in Hungary have been reinvested. In Q4, the government's austerity measures caused growth of domestic demand to slow significantly.

Gross wage growth slowed slightly, while net wage growth slowed markedly because of higher payroll taxes and contributions. Meanwhile, higher VAT and centrally-regulated energy prices caused inflation to pick up. This means real wages rose by just 3.5% in 2006, GKI says. Pensions increased 3.6% in real terms. GKI puts the 2006 general government deficit at 9.5% of GDP, well over the previous year's 7.5%. It estimates annual average inflation was 3.9% and put year-end twelve-month CPI at around 6.5%. GKI said the forint traded at an average 264 to the euro in 2006. It put the year-end rate at 250-255. (Mti-Eco)

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