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GKI sees deep recession in 2012

Economic research company GKI on Tuesday said it expects Hungary’s economy to contract 1.5% in 2012, even more than the 1% decline in GDP it forecast in the previous projection in September.

GKI said Hungary’s industrial sector was likely to grow 5.5% in 2012, up from 4.5% in the previous forecast, but it saw decline or stagnation in most of the country’s other business sectors.

GKI now expects domestic consumption to fall 4% next year, at a faster pace than the 2.5% decline forecast in September. Household consumption is set to drop 2.5% and fixed capital formation is expected to fall by 4%.

The researchers project employment to drop 1% and the jobless ratio to stay at this year’s 11%.

Despite a projected 2.5% decline of retail trade volume, government tax and price rises could lift annual average inflation to 5%, GKI said, projecting a twelve-month CPI of 4.5% for December 2012.

The forint’s exchange rate and the central bank base rate will largely depend on progress on the country’s planned agreement with the IMF, the closure of the early repayment scheme and the government’s agreement with banks.

The institute expects an average HUF/€rate of 290 for 2012, and a 7-7.5% central bank base rate at the beginning of next year. The forint could firm to close to 280 to the euro and the base rate could drop to 7% under an optimistic scenario.

GKI puts the general government deficit at 2.9% of GDP in 2012, over the 2.5% government target.

With the higher deficit and the contracting GDP it projects the state debt ratio to rise to 84% of GDP.

GKI said Hungary’s economy was in a "dead end" that required a "genuine economic policy turnaround".

"There is no alternative to an agreement with the IMF," it added.

Hungary is seeking financial assistance from the IMF and EU as a precautionary measure. The assistance is to serve as a "safety net", allowing the country to continue financing itself from markets.