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Erste, GKI project 3% GDP growth, 6% fiscal deficit in 2007

Hungary's GDP will grow by at least 3% this year, inflation will slow to around 4% by the end of the year after peaking at 8% in the H1, Economic research institute GKI said in a report prepared in cooperation with Erste Bank.

The fiscal adjustment will slow Hungary's growth less than generally thought as the country's GDP growth is more affected by external trade and European growth than domestic consumption or investments, the researchers said. The report projects an 8% rise of industrial growth, a 4% rise in the performance of the construction sector and business services and only a slight expansion in agriculture.

Trade sector will hardly grow and the performance of public services will decline. Analysts expect general government deficit at 6% of GDP this year, less than the government target of 6.8%, due to a lower deficit last year, various expenditure cutting steps and an expected drop of interest rates in the H2 of the year. Gross public sector debt as a share of GDP will peak at slightly above 70%, less than forecast in Hungary's convergence program, due to the lower 2006 and 2007 deficits, a strengthening of the forint and privatization revenues, the researchers said.

GKI expects real wages to decline by 3.5% on average, returning to their 2005 level. Private sector gross wages will probably grow around 7%, similar to last year, turning into a real wage drop of 1-2%, public sector employees will have to face a 6-8% real-term drop with the average wage rise in the sector seen at 2%. The real value of pensions is expected to stagnate throughout the year.

Despite a fall in real earnings, private consumption is not expected to decline and net savings are still projected to rise with a projected slowdown of new retail borrowing. Employment will drop slightly due to a projected 3-4% decline in the number of public sector employees, and the rate of unemployment will rise slightly, to 7.8-8%. (Bloomberg)