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Hungarian growth slowed in Q4 on austerity measures

Hungary's economy lost momentum in the Q3 as government measures to curb a budget deficit sapped consumer spending while the state cut investment.

The economy grew 3.2% from the same period last year, slowing from 3.8% in the previous quarter, the Budapest-based statistics office said today. That is the slowest pace since the first quarter of 2005 and compares with a 3.4% median estimate of 11 economists in a Bloomberg survey.
Prime Minister Ferenc Gyurcsány has raised taxes and cut subsidies to meet European Union demands that he bring down the deficit, deterring investors and crimping household spending. Consumer confidence has declined and the government severed spending on projects such as highway construction. „This is the part of the austerity measures that the government has direct control over,” said Gyula Tóth, an economist at UniCredit MIB in Vienna, before the report.
„There are serious delays in government projects, especially road-building. The slowdown for consumer demand is apparent.” Hungary's economic growth, the slowest in eastern Europe, is set to lose more speed. The government estimates this year's rate will be 2.2%, the slowest in a decade, followed by 2.6% growth in 2008.

Consumer confidence dropped to minus 52 in December, the lowest since the index was introduced in 1996, market research company GKI said. The pace of expansion lags behind other nations that joined the EU in 2004 and this year. Slovakia's economy grew 9.8% in the Q3, Czech GDP rose 5.8%, the same rate as Poland's.
Of the bloc's newest members, the Romanian economy grew 8.3% and Bulgaria's expanded 6.7%. Gyurcsány started cutting the deficit in the face of threats that the EU would cut off aid. Monetary Affairs Commissioner Joaquin Almunia in October issued a final warning to the government to comply with the bloc's fiscal regulations.
While the EU endorsed Hungary's deficit-cutting plan, its executive arm warned that slower-than-forecast economic growth after next year may hurt the program. „The budgetary outcomes could be worse than targeted,” the European Commission, the EU's Brussels-based executive body, said in a ruling on February 7. „Lower-than-projected GDP growth in the outer years could lead to a higher deficit.”

The budget deficit, which has exceeded the government's target every year since 2001, also forced Gyurcsány to abandon a plan to adopt the euro in 2010. The government now says it will slash the shortfall to near EU limits by 2009, which would allow for switching currencies two years later. Government measures are also affecting companies, with the corporate income tax having increased by 4 percentage points.
That led to threats from investors such as Volkswagen AG, Europe's biggest carmaker, and Teva Pharmaceutical Industries Ltd., the world's biggest producer of generic drugs, that they will scale back investment. „Domestic demand is gradually weakening as accelerating inflation is eating up part of household's purchasing power, weighing also on corporate investments,” said Radomir Jac, an economist at PPF Asset Management in Prague.

Teva may halt a €77 million investment plan, while Gedeon Richter Nyrt, Hungary's largest drugmaker, will scale back spending by Ft 10 billion, the country's pharmaceutical industry association said on January 31. Hungary has benefited from an influx of more than €50 billion of foreign direct investment since the collapse of communism 17 years ago.
The country now relies on exports from the local units of foreign companies and local manufacturers such as drugmaker Richter and plastics manufacturer Borsodchem Nyrt to drive economic growth. Their output helped keep growth rates above the EU average while consumer demand fell. „What's really positive is net exports,” said Tóth at UniCredit.
„Industrial output figures were spectacular and healthy European growth helps keep demand for these products.” Industrial growth was an average 11.8% higher in the Q4 than in the same period last year, accelerating from 10.9% in the third. The December pace, at 14%, was the fastest in almost six years. (Bloomberg)