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GKI: Effects of tighter budget, reforms to show up only in 2007

The effects of a tighter budget in 2007 and a series of reforms will improve investor confidence in Hungary and cause the forint to strengthen, but the country’s assessment will only improve markedly next year, according to the latest projection by economic research company GKI, prepared in cooperation with Erste Bank and published on Monday. The effects of centrally-regulated energy price increases in August and the VAT rise in September will push twelve-month year-end inflation to 5.8% and annual average inflation to 3.7%, according to GKI. Twelve-month inflation is expected to peak in the early summer of 2007, then fall steeply. Twelve-month consumer prices bottomed out in April at 2.3%. But by August, CPI reached 3.5%. GKI noted that Hungary’s economic growth slowed in the Q2 of 2006, but picked up again in July. Industrial production expanded at a similar pace as in the Q1, with the vehicle manufacturing segment, one of Hungary’s biggest industries, growing one-third in July from the same month a year earlier. Hungary’s construction sector also grew in July, albeit slightly, after contracting in the previous months. Trade sector growth, however, continued to slow in July, with vehicle sales falling. But vehicle fuel sales grew 10% in spite of higher prices.

The H1 deficit of Hungary’s current and capital accounts combined was €400 million more than in the same period in 2005, but the difference was mainly the result of the timing of the disbursement of EU subsidies, expected to be received in the second half of the year. The trade balance improved, but, within this, the services balance deteriorated, even though the tourism surplus increased. Income outflow picked up. GKI projects gross wage growth to slow during the remaining months of 2006, while net wages will actually fall compared to the H1 – though still increasing over their level twelve months earlier. For the whole year, GKI expects real wages to rise 2.5% over 2005. Unemployment started falling after the Q1 of 2006, but has since risen again. And GKI expects it to increase further by year-end partly because of seasonal factors but also because of the effects of layoffs to be started in the public sector. (Mti-Eco)