GKI projects stable politics, accelerated reforms

Analysis

Hungary's political situation will stabilize and the pace of reforms and budget-balancing measures will pick up, according to the latest projection by economic research company GKI, prepared with the assistance of Erste Bank.

GKI said investor confidence would improve and the forint would strengthen further. However, it warned that any marked improvement in the assessment of Hungary would only be seen next year. GKI projects Hungary's economy will expand 4% in 2006, with domestic demand slowing as export growth picks up. Hungary's terms of trade, however, will deteriorate at least 2%, bringing the trade deficit to €2.8 billion, or 3.3% of projected GDP. The current account deficit will reach €5.3 billion in 2006, about the same as in the previous year and equivalent to 6% of GDP. Austerity measures will have little effect on growth this year, GKI says. However, domestic demand will grow at a slower pace in the fourth quarter. Gross wage growth will slow, and net wages will increase even less because of higher wage contributions. At the same time, the rise in VAT and hikes in centrally-regulated energy prices will cause inflation to speed up.

GKI expects real wages to rise just 3% in 2006, slowing from a 5% year-on-year rise in the first half of the year. Real pensions will increase 4% in 2006. In the second half of 2006 households have been more frugal, putting off investments such as new home purchases and taking out less new credit. At the same time, they are trying to maintain their standard of living. GKI projects household consumption will slow to 2-2.5% in 2006 and fall to practically zero by year-end in a twelve-month comparison. Investments will increase 5% in 2006, matching the rise in the previous year in a best-case scenario, GKI says. GKI warns that the central budget is spending Ft 120 for every Ft 100 of revenue. Although a correction has already started, the 2006 fiscal deficit will reach 9.5% of GDP, well over the previous year's deficit of 7.5% of GDP. GKI expects consumer prices to rise and average 3.9% in 2006. It puts year-end inflation at 6-6.5%. As foreign investors regain confidence in the government's economic policy, the forint will continue to strengthen, trading at 260-275 to the euro in the remaining months of the year. GKI puts the average forint/euro rate for 2006 around 266. It says the National Bank of Hungary will probably not raise rate further over the current 8.00% before year-end. (Mti-Eco)

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