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Czech, Hungarian GDP growth to slow on budget woes

Hungarian and Czech economic growth will slow next year as governments slash deficits, while other eastern European Union nations enjoy sustained growth, the Organization for Economic Cooperation and Development said.

The Hungarian economy will probably advance 2.2% next year, compared with a projected 4% this year, while the Czech economy will expand 4.8%, compared with 6.2% for 2006, the Paris-based OECD said in its outlook released today. By contrast, the Slovak economy will grow 8% next year and Poland's domestic product will grow 5.1%. The former communist nations that joined the EU in 2004 have benefited from increased trade and investment, causing GDP growth to surpass the 2.2% expansion expected next year in the 12 euro-sharing countries. Still, the Czech Republic and Hungary, who dropped plans to adopt their euro in 2010, will lag behind others in the region as they make the necessary spending reductions to make the switchover in the next decade.

In Hungary, “recent indicators suggest that the fiscal austerity measures announced after the elections have started to bite,” the OECD said. “Weakening domestic demand is projected to slow growth in 2007 and 2008 despite exports continuing to expand strongly.” Hungary has been singled out by the EU as having the bloc's largest budget deficit according to the size of the economy. Prime Minister Ferenc Gyurcsány has raised taxes and cut subsidies to cut the deficit, the European Union's widest. Hungary has missed its targeted shortfall every year since 2001, forcing the government to abandon the plan of adopting the euro in 2010.

The current program has no target date. In the Czech Republic, the OECD pointed out that the lack of a viable government since a political stalemate following June 2-3 elections is crimping its ability to do what is needed to qualify for the euro, the OECD said. The past Social Democratic government of former Prime Minister Jiri Paroubek was reluctant to cut spending on social benefits. The current cabinet of Premier Mirek Topolanek is struggling to build a government that will be approved by lawmakers, amid calls for less spending cuts. “The slow progress in structural reforms, the signs of a weak budget discipline and the postponement of the euro entry have contributed to an increased risk of serious fiscal problems with downside impacts on growth in longer term,” the OECD said about the Czech Republic.

In Poland, growth of 5.1% this year will continue into 2007, the OECD said, as the largest economy in the newest EU members attracts investments, helping to bring down the highest unemployment rate in the EU. “Economic performance has been improving steadily, with growth of 5% combined with low inflation and plunging unemployment,” the OECD said of Poland. “Continued strength in investment and exports should support robust growth in 2007 and 2008.” Expansion in Slovakia will probably reach 8% in 2007, little changed from 8.2% projected for this year. Growth is accelerating from 6% in 2005, driven mainly by shipments of cars by new factories of PSA Peugeot Citroen and South Korea's Kia Motors Corp, which began production this year and will boost shipments next year. This year, Peugeot completed construction of a €700 million ($920 million) factory with a capacity of producing 300,000 cars a year. The company will ship 50,000 vehicles in 2006. Kia invested about €1 billion in similar-capacity plant in Zilina, which began commercial production this year. (Bloomberg)