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GKI calculates 1.7 % GDP growth this year

The expected rate of GDP growth this year and next year will be significantly slower, only between 1.5% and 2%, based on recent international and national statistical data – says the monthly flash report of GKI. Weak domestic demand makes it difficult to achieve the budgetary targets; however, it improves the external balance and restrains inflation.

The deteriorating growth prospects of the Hungarian economy are in part a consequence of the worsening global economic environment. They are particularly adversely affected by the dramatic appreciation of the Swiss franc, because it reduces the purchasing power of people due to the growing burden of loan repayment.

Hungarian GDP stagnated in the second quarter of the year compared with the previous quarter, and it was one of the weakest results in the EU. In June, Hungarian industrial output was 1.4 % lower than a year ago, while it increased by 1.7 % in the EU. It is alarming that while industrial export has been the driving force of the Hungarian economy until now, its level has been declining since March compared with the preceding month, and the assessment of orders has also been deteriorating. The decline of sectors focusing on the domestic market continues and no changes can be expected in the second half of the year either – noticed GKI.

Domestic sales of industry have been declining for four years. Retail sales have been going down for five years. Agriculture may help GDP, because the bad harvest of last year will be followed by an excellent one this year.

According to GKI, expected increase in real wages has not raised consumption. The value of the GKI consumer confidence index slightly increased in August, but it was before the strengthening of Swiss franc. Household consumption will not increase over the previous year. The exchange rate of the Swiss franc to the forint assumed at HUF 230-HUF 240 will consume around 2 % of household incomes, which equals to the real yields of private pension funds.

Consumer prices were 0.3 % lower in July than a month earlier, thanks to primarily the weakening upward pressure on food prices. According to GKI, inflation will be around 3.8 % in 2011 as a result of subdued consumer demand, favorable agricultural prices and frozen public utility prices. The planned government cuts may accelerate the rate of inflation. The additional increase of energy and utility prices delayed in 2011 will also generate inflation. In 2012 the rate of inflation will be largely determined by political decisions. GKI says it is impossible to raise market prices because market developments would justify only very modest price increases, since the demand of households has been decreasing year by year.

The rate of inflation in 2012 will be around 3.5 %, without dramatic government intervention. According to the projection of GKI Monetary Council will leave the interest rate at 6 % for a longer period.

In the first half of 2011 investments decreased by 4 % compared with the previous year and according to GKI decrease is going to continue in 2011.

Of the major industries only the manufacturing sector indicated some growth, and, in addition to this sector, investments increased only almost exclusively in public services. Retail trade declined further as well. With the exception of agriculture and industry, other sectors are stagnating or falling back in 2011. The rate of GDP growth will be around 1.7 % both in 2011 and 2012.

In 2012 construction will not fall further and industrial production will slightly increase as a result of the starting operation of new car factories, despite the weakening general economic activity. Investments will increase modestly next year.

In the second quarter of 2011 the number of employees grew by about 30 thousand, and the number of unemployed decreased by 13 thousand compared with the previous year. Business sector's intention to employ has been declining for several months. The number of people participating in public employment decreased, and three quarters of them worked only in part time. Unemployment will increase slightly by the end of the year as there are less seasonal jobs in winter. According to GKI surveys, the rate of unemployment is going to be 10.5 % at the end of 2012.

The sustainability of the general government deficit in 2012 will be really critical, and the problems due to the slow economic growth make it more difficult. According to GKI, it is quite likely that the previously planned tax reductions will not be implemented next year, and a HUF700bn improvement of the general government balance will be needed.