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GKI projects slower growth, weaker forint, but improving balance

Hungary's economy will grow at a slower pace and inflation will rise, but the country's balance will improve, renewing investor confidence and causing the forint to firm, according to the latest projection by economic research company GKI, prepared with the assistance of Erste Bank.

GKI projects Hungary's economy will expand 4% in 2006. GKI expects GDP growth to be about the same in the fourth quarter of 2006 as in the third quarter. GDP growth was 3.7% in Q3, down from 4.7% in Q1. GKI expects industrial growth to stabilise around 10%, with exports increasing close to 14% and imports rising 6%. The construction sector will stagnate in a best-case scenario, GKI said, noting that the segment had expanded at a slower pace in a twelve-month comparison for the year so far. The effect of government austerity measures has had limited effect so far on retail sales, which grew 4.5% in September compared to the same month a year earlier, only slightly under the 5% average growth in January-September. But analysts say growth will slow further during the rest of the year. As the result of smaller nominal wage rises and rising inflation, real wages fell 2% in September compared to the same month a year earlier. In January-September, real wages rose 4.8%. Consumer price inflation has been rising faster after bottoming out at 2.3% in March and April. CPI reached 5.9% in September and 6.3% in October. GKI expects CPI to peak near to 8% in the spring of 2007, then fall to around 4% by year-end. GKI projects the general government deficit will reach 9.5% of GDP in 2006, well over the previous year's 7.5% and exceeding the government's target of 7.5-8.0%. GKI expects the current account deficit to be about the same as it was in 2005. The forint has strengthened about 6% since the beginning of October after weakening about 10% in the middle of the year on regional effects as well as the government's economic policy. Analysts attribute the firming to more optimism in the region as well as the implementation of the government's convergence program. GKI expects the National Bank of Hungary's base rate to rise no further than the current 8.00%. (Mti-Eco)