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Hungary's economic growth slows to 10-year low

Hungary's economy grew by a seasonally-adjusted 3% year-on-year in the Q1 of 2007, the Central Statistical Office said on Tuesday.

The figure was higher than analyst expectations but still the lowest growth in ten years. Hungary's GDP growth had been expected to slow to somewhere between 2.3 and 2.5% as a consequence of a government austerity package to try to cut the huge budget deficit. However, analysts said that despite beating expectations the performance was still far from great.

„It is important to note that from regional perspective this is still a very poor figure,” Gyula Tóth, an analyst at UniCredit in Vienna, told „The economy has grown around 0.6% below potential in Q1.” Hungary's GDP growth has averaged at around 4% annually for the last six years, reaching a peak of 4.9% in 2004. However, the government's austerity package has taken its toll, and the government predicts overall GDP growth this year will be 2.2%.

The austerity package increased the tax burden, raised energy prices and targeted reform in healthcare and education, amongst other measures. With a deficit of 9.2% in 2006, Hungary has by far the largest budget gap in the European Union, with Italy next on 4.4%. Inflation has also soared due the package, but the April figure dropped to 8.8% from a peak of 9%.

This, coupled with the higher-than-expected GDP growth, prompted analysts to predict a greater chance of a 25-basis-point cut in the base interest rate when the Hungarian central bank meets next Monday. The bank has raised the rate to 8% and held it there for almost six months in an effort to combat the rising inflation. Unadjusted GDP growth was 2.9%. (