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EC sees Hungarian economy contracting 0.1% in 2013

Hungary's economy is expected to contract 0.1% in 2013, according to a fresh forecast by the European Commission published on Friday. The government projects Hungary's GDP will rise 0.9% this year. The EC expects Hungary's GDP to grow by 1.3% in 2014, according to the winter forecast, boosted by an "increased contribution from net exports but also from some expansion in domestic demand". "Private investment is set to remain negative in view of the continued fall in corporate lending; on the other hand, government investment may be boosted by a higher inflow of EU funds," the EC said. The EC noted that tighter than assumed financial conditions could lead to weaker growth, but added that "recent official statements on fiscal loosening measures" could result in some short term gains in consumption. The EC puts the country's general government deficit at 3.4% of GDP in both 2013 and 2014, up from 2.4% estimated for 2012. It attributed the rise to the phasing out of temporary extraordinary taxes introduced in 2010 and other one-off revenue equivalent to 1% of GDP, revenue reducing stimulus measures equivalent to more than 0.5% of GDP and a reduction in the personal income tax for high earners exceeding 0.25% of GDP. Other smaller elements, such as an extended scheme for fostered workers, extraordinary support for institutions of higher education and the fiscal impact of lower than budgeted inflation will cause the deficit to widen by 0.75% of GDP, the EC said. Hungary's government aims to keep the deficit under the 3% European Union threshold. The National Economy Ministry said in a statement after the forecast was published that Hungary "will certainly be capable of keeping the budget deficit well under 3%", noting the big discrepancy between its own growth projection and the EC's. The ministry also said the EC had failed to take into account in its projection several government measures that will have a fiscal impact, such as connecting tills to the tax office and introducing an electronic toll system. Asked to comment on the projection, Minister without portfolio Mihály Varga also mentioned the fiscal measures that the EC had not considered and noted that the projection was made early in the year, before economic trends for the period were clear. He said that this year's budget has HUF 400 billion in reserves that can be tapped in the case of unforeseen economic turns. Speaking at a press conference in Brussels on Friday, European Commissioner for Economic and Monetary Affairs Olli Rehn acknowledged the Hungarian government's commitment to keeping the deficit under the threshold, but said the EC expects the government to communicate measures in its convergence programme that are aimed at achieving the target. These measures should be of a structural nature, he added. Rehn said Hungary was among six member states against whom excessive deficit procedures could be dropped. The EC projects consumer price inflation, harmonised for comparison with other EU member states, will fall to 3.6% in 2013 and 3.3% in 2014. Harmonised CPI will fall in 2013 because of the removal of tax hikes from the base period and government mandated cuts in household utilities prices from the start of the year, it said. The unemployment rate is set to climb to 11.1% in both 2013 and 2014 from 10.8% in 2012, according to the EC.