Although Hungarian authorities claimed in October that the country was a “victim of mistaken identity,” Hungary is the first European Union member state to have sought a stand-by loan from the International Monetary Fund since financial turmoil hit Iceland in mid-2008. Recent figures indicate that the Hungarian economy is not in good shape, that it was close to recession even before the liquidity crisis and will certainly be in recession in 2009.
An important indicator for the current dangerous state of the economy is industrial production: In October, it contracted by 7.2% year-on-year, the largest decline in 16 years. The growing number of layoffs since then at construction businesses and at automobile and electronics manufacturers (including Suzuki and Nokia) indicate that a further decline in output is to be expected, though it is also possible that some medium-sized companies are just taking the opportunity to reduce their head count.
The macroeconomic conditions for businesses are likely to remain unfavorable, with high taxes and very high interest rates that are denominated by the forint. The National Bank resorted to a surprise interest rate rise of 300 basis points in October after the forint depreciated by more than 10% that month. In spite of three subsequent small reductions in the interest rate, its level of 10% is still much too high for companies with good opportunities for growth
While there was a good agricultural season again in 2008 (unlike in 2007) and the better-than-usual agricultural output helped boost growth in gross domestic product and exports, this factor also reveals that the main sectors of the economy (services, industry and construction) are not doing well.
The 50% growth in agriculture (the combined impact of 2007’s bad, and last year’s excellent, weather) pulls the GDP index upward by a full two percentage points. Without this, there would have been a 1% contraction year-on-year in the third quarter. All the other major sectors of the economy, including industry, the construction sector and services, are in technical recession.
The government of Prime Minister Ferenc Gyurcsány aims at further reducing the general government deficit – one of the conditions of foreign lending – to 2.6% of forecast GDP, from last year’s revised target of 3.4%, which Finance Minister János Veres now says may be undershot.
Deficit-reducing measures include a cut in real wages in the public sector and a reduction in the nominal growth of pensions. Business enterprises are also offering wage increases below the expected rise in the consumer price index for 2009 (4.5%).
However, the result has already seen tensions on the shopfloor and strikes. Employees at Budapest Ferihegy International Airport and railway employees both went on strike. Budapest bus drivers called off a stoppage after the government’s agreement to increase the city transport company’s funding.
All in all, the annual change in GDP this year may turn out worse than the official forecast, which is for a contraction of 1% year-on-year. Some are forecasting a GDP contraction as severe as 3%.
If the forint continues to be weaker than in recent years this may support exports of industrial goods, but the main export markets (Austria, Germany and Italy in particular) are unlikely to provide any strong demand for Hungarian-made products in the months to come. (BBJ)