The European Commission projected Hungary’s economy will grow 1.4% in 2011 and 0.5% in 2012 in its European Economic Forecast for autumn published on Thursday.
The projections are down from 2.7% for 2011 and 2.6% for 2012 in the Commission’s spring forecast.
Hungary’s government projects 1.5% GDP growth in 2012.
"The gloomier outlook stems from the deterioration of the external environment...as well as an acute domestic perception of squeezed demand and policy uncertainties," the Commission said in the forecast. In addition to the slowdown on Hungary’s export markets, banks are facing higher funding costs and tighter liquidity, squeezing credit for the economy further, it added.
Uncertainties about further austerity measures have directly affected consumption and businesses, weighing on investments, the Commission said. Personal income tax cuts have not lifted domestic demand, but may have cushioned the impact of negative developments, it added.
The Commission said additional fiscal measures planned in the context of the 2012 budget would further subdue economic activity.
The Commission said the net impact on consumption among participants of a government scheme allowing full early repayment of foreign currency-denominated loans at discounted exchange rates was "ambiguous at best".
The Commission noted Hungary expanded labor supply as a positive development. Policy decisions are "now bearing fruit", but job creation "remains a challenge", it said. It said a planned 18% minimum wage increase would hurt labor demand in the segment where employment challenges are the most acute and could pose a serious threat to the viability of many small businesses, the Commission said.
Risks to GDP growth in 2012 remain on the downside, the Commission said.
The Commission modified its projection for Hungary’s general government deficit in 2012 to 2.8% of GDP from 3.3% in the spring forecast because of "recently announced consolidation measures, which more than offset the worse macroeconomic forecast".