Hungarian economic growth slowed in Q2

Analysis

Hungarian economic growth probably slowed in the Q2 as anticipated government spending cuts sent a chill through the housing market, a survey of economists shows. The economy probably grew an annual 4.3%, compared with 4.6% in the previous three months, according to the median estimate of 16 economists in a Bloomberg survey conducted on Aug. 7-10. The government will release the report at 9 a.m. in Budapest today. Consumer confidence fell to the lowest in a decade in July on expectations incomes will fall amid plans by the government to raise some taxes and cut spending to control a widening budget deficit, research institute GKI said yesterday. Construction output in the $109 billion economy was lower in April and May than in the same months last year, according to the country's statistics office. “It's obvious that people started to save,” said Gergely Suppan, an economist at Takarékbank Zrt in Budapest. “The decline in construction activity was visible. Housing projects are being halted because of the decreasing disposable income people will have.” Hungary's economy is growing at the slowest rate in eastern Europe. The pace may be the slowest in a decade next year, as Prime Minister Ferenc Gyurcsány’s measures are implemented, according to government and central bank forecasts.

“The fiscal package will hit the economy,” said Dietmar Hornung, an emerging-markets economist at DekaBank Deutsche Girozentrale in Frankfurt. “The H2 of 2006 will already be painful.” Hungary's economic growth, even at more than twice as much as the 2% in the 12 countries sharing the euro, lags the other nations that joined the EU in 2004, including the Czech Republic, where growth in the Q1 was 7.4%, and 5.2% in Poland during the first three months. Gyurcsány has pledged to narrow the EU's widest budget deficit compared with the size of the economy in order to adopt the euro and comply with EU budget rules. It abandoned plans to adopt the euro in 2010 and is planning to set a new target. Gyurcsány expects growth to slow to 2% next year, the slowest since 1996. Growth in the past 10 years averaged 4.2%, peaking at 6.6% in the Q1, helping the economy to more than double in size in the past five years. The government has said fixing the country's budget problems is now more important than ensuring growth. Gyurcsány has been criticized by the EU, the central bank and credit rating companies for failing to control the shortfall.

“The forecasts are deliberately modest,” Gyurcsány said on July 4. “I cannot give up any goal of this program. It's impossible to turn back. It's impossible to relax this program.” Hungary, as other nations in the region, has benefited from the influx of foreign investment as companies including General Electric Co. and Suzuki Motor Corp. poured in more than $65 billion since 1989. The country now relies on exports from the local units of foreign companies and domestic manufacturers such as drugmaker Richter Gedeon 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. “Industrial output will not be impacted by the decline in consumer demand,” said János Samu, an economist with Concorde Securities in Budapest. “The largest manufacturers like Suzuki already announced further investment plans, which suggests that the dynamics will not change dramatically there.” Industrial production grew by an average monthly 8.7% in the Q2. That's down from 11.3% in the previous period and compares with 8.8% in the same period of 2005. (Bloomberg)

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