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Economic growth, balance to outwardly improve in 2011

The Hungarian economy's growth and balance will undergo considerable ostensible improvement in 2011 with the achievement of the planned consolidation of the government budget, though structural changes are expected to play a more limited role in the realization of this objective than stated at the moment, economic research company GKI said.


Markets and international organizations are expected to respond negatively to this, the effects of which could be felt as early as this year, GKI said.

GKI notes that the convergence program submitted to the EU promises that the improvement will be sustained, and the program has been well received by financial markets.

The Hungarian economy will grow around 2.5% in 2011 compared to 1.2% in 2010, and up about 0.7 %-points from the expected EU average. However, the increase compared to 2010 will come almost entirely from agriculture as last year's growth was decreased by 0.5 percentage points as a result of the 15% decline of the farming sector, while - assuming average weather conditions - it will lift the growth rate by a similar extent this year.

In a regional comparison, Hungary will only overtake Romania and Slovenia in terms of economic growth this year.

Growth will continue to be driven by industrial exports. The decline in domestic demand will come to a halt, but no major expansion can be expected just yet. The construction sector, declining for the sixth consecutive year, is not expected to start growing until the second half of the year. Trade is expected to grow slightly after the first few months, mainly in auto sales and the consumer durables segment, GKI said.

The freezing of the HUF 250 billion budget reserves also curbs domestic demand, and lending conditions are still becoming tighter. The slow start to the New Szechenyi Plan and the slow resumption of the payment and allocation of EU-funding restricts investment demand. Investments are growing only minimally, boosted by a few major automotive industry projects, GKI said.

GKI expects real wages to grow 2% as wages will rise 2.5% in the business sector and 1% in the public sector. Households' real incomes are set to grow around 2%, and differences between incomes are expected to grow further. Households' purchased consumption will grow just 1.5% as loan repayment burdens are high and borrowing opportunities are limited, GKI points out.

Under the ESA methodology, it is not the 2.94% deficit in the budget act that will have to be stated as the deficit for 2011, because the total amount of the assets moved over from the private pension funds must be to stated as capital income gained in 2011. However, the planned debt consolidation of state-owned transport companies MAV and BKV, the buy-out of certain facilities built through PPP-projects, possibly the take-over of some municipally-owed debts will worsen the balance. GKI predicts an ESA surplus of around 2% for 2011, in line with the government's projection.

GKI said the size of the one-off spending from the private pension fund assets is shown by the fact that the general government deficit would be around 7% of the GDP without these assets. The excessive deficit procedure and what is known as the spring economic-policy period will primarily assess the structural deficit not including one-off items, which is expected to grow by official calculations as well in 2011.

GKI said budget restructuring plan titled Szell Kalman Plan and the convergence program envisage a turn in the right direction, and make it likely that the government budget deficit target of 2012 will be achieved. However, the policy tools could still change significantly as policy programs have not been developed in detail and social acceptance is uncertain, and structural change will be more limited than declared at the moment. Therefore, foreign assessment and consequently the exchange rate of the forint could fluctuate over the year, GKI said.