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ICEG analyst predicts -1.6% economic contraction in 2009

The European Center of the International Center for Economic Growth (ICEG) announced that it expects Hungary's economy to contract by 1.6% in 2009.

Speaking at the conference of Institute for International Research in Budapest, ICEG researcher Gábor Pellényi said that macroeconomic conditions significantly deteriorated over the last few months, while export markets are expected to drop, but net export GDP will increase because import will decline due to narrowing demand.

Hungary's Central Statistical Office reported that Hungary's GDP decreased already in Q3, while the recession could end by H2 2009 if the financial crisis does not worsen, Pellényi said.

ICEG said the only positive outcome of the crisis is the slowing of the inflation rate. ICEG expects 4% inflation in 2009, which will drop to 3% by the end of next year, meeting the Central Bank’s (MNB) mid-term inflation target.

Hungary's net liabilities will decrease, the real economy will have to adapt to more difficult conditions in the access of funding. Pellényi said that debt servicing might become more expensive, with stronger profit outflow, but the EU capital transfer will have a net inflow surplus.

Pellényi said the government will maintain its deficit target, because it can not let its credibility falter through not keeping it. The budget includes reserves necessary to maintain the target despite weakening economic growth.

Pellényi said fewer loans in the private sector will make short-term lending more difficult. Quoting the MNB report, Pellényi said that medium-sized enterprises are ignoring their dependence on currency rates, which could put them in danger. About 14% of enterprises are generating losses even with stable rates, while their number could increase 6 percentage points to 20% if currency rates worsen by 10%.

Households are primarily under the influence of expectations regarding the job market and the real economy, while a recession, which would decrease the employment rate by 3 percentage points and increase the unemployment rate to double digits, would result in a 4.8%-5.8% rise in the number of insolvent households.

Pellényi said Hungarian households do not serve as extreme examples within the EU, because while their debts are above those of other new EU members, they are below the EU average. Pellényi said he is worried not about the size of debts, but the rate of currencies involved, which makes households more vulnerable. The amount of loans in foreign currencies are presenting a risk to the system, the management of which the MNB, PSzÁF and the Hungary's budget policy are equally responsible. (MTI – Econews)