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GKI sees economic growth of 1% in 2010

Economic think tank GKI expects economic growth of around 1% in Hungary this year as export and service industries are expected to show growth, while the turnover of domestic companies, including construction and trade companies, will continue to decline, according to GKI's forecast prepared in partnership with Erste Bank.

GKI said confidence in the Hungarian government and economy was shaken in early June as a consequence of negative official communication regarding the Hungarian economy. The researchers noted that there is effectively no room for maneuver left in terms of the general government deficit, which is expected at around 4% of GDP in 2010, very close to the 3.8%target adopted by parliament.

GKI says the 29-point action plan announced by the prime minister in early June is necessary and follows the right direction in several of its components, although it questioned several details, among them the banking tax.

“It seems unrealistic and damaging to collect HUF 200 billion a year - half of their annual profit -, and especially over four months this year, from financial institutions", GKI-Erste Bank forecast said. The move could lead to even tougher financing conditions. The researchers also had doubts how realistic the planned HUF 120 billion savings in government expenditures or the almost HUF 50 billion to be saved in state-owned companies' wages were.

Assuming an economic policy consulted with international organizations and a stabilization of global investor mood, demand in Hungarian financial instruments could rise again in the second half of this year. The central bank could then cut the base rate to around 5% by the end of 2010. GKI-Erste predict a forint/euro rate of around 270 for the second half of this year just as it was in the first half, stronger than its level in June.

It seems unavoidable that the government set the target to comply with the budgetary convergence criteria for 2012 or 2013 at the latest in the updating of the convergence programme in the autumn. This would allow for euro adoption in 2014. In that case, it would make sense to announce 2014 as the target date for euro adoption at the end of this year and to initiate accession to the ERM-2 system. This could serve as an economic policy anchor, increase the room for interest rate cuts, strengthen the country's ability to attract foreign capital and contribute to accelerating economic growth in the next few years.

Hungary's external balances are expected to be remain good this year, with a current account surplus of €0.8 billion in the first quarter. In net terms Hungary does not depend on external financing - the current account will be balanced and external financing will show a surplus of €2.4 billion or 2.4% of the GDP, higher than last year's surplus. (MTI-ECONEWS)