ECOSTAT NEWSLETTER
- October 2001 -
 

The global economic trends of the past month have essentially been determined by the September 11 terrorist attack on the United States. This assault has seriously affected an American economy that over the year had been growing at an increasingly slow rate (but not stagnating). Thus it has had an indirect effect on the world economy, resulting in major macro-economic indicators deteriorating faster than before. Although pessimism has broken the rapidly-responding stock-exchange and trust index trends in particular, it has also had consequences in terms of the real economy, primarily in the volume of air travel, tourism and the hotel industry, as well as, with some delay, aircraft production. The major economic forecast institutes have been continually tailing down their forecasts for the year: the Economist Intelligence Unit (EIU), for example, now expects growth of 2.9% for the US and 2.2% for Europe in 2002, as opposed to the previously forecast 3.5% and 2.4%, respectively. Growth this year is expected to be around 1% for both regions, the adverse effect on the EU expected to be less, however, due to its firmly established internal markets.

In order to counterbalance the decline in demand, governments have opted for expansive fiscal policies, chiefly involving the rescheduling-i.e. bringing forward-of investments. It is well known, however, that investments have a deferred effect in terms of generating demand, whilst jeopardising budget equilibrium in the short term. The employment of demand-generating economic policies thus appears to be a path of constraint, with the results of steady interest rate cuts still to be seen despite the fact that they have been applied by the central American banks since the beginning of the year, followed, with some delay, by their European counterparts. A modest increase in economic growth may only begin during the first six months of next year.

Hungarian economic policy has been confronted by similar challenges. Intending to avoid a decline in growth, whilst supporting another priority-cutting back inflation-the government has responded to the changed situation by accelerating the development and implementation of its Széchenyi Plus program package. This essentially involves encouraging a growth in demand through expediting housing policy and infrastructural investments and bringing forth the expansion of solvent demand. Apart from other influences (such as reducing the forint's exchange rate), this has initially been supported by interest rate cuts of 1%, followed by another cut of 0.25% in late October. The inflation trend has been favourable with the 12-month consumer price index dropping to 8% by August, with a good chance of the December price index falling to around 6%. The slight devaluation of the forint, brought about by the interest rate cuts, has all but restored the former exchange rate and prevented foreign exchange speculation at the expense of the forint. Such a small devaluation will not threaten the achievement of the inflation goal.

All that considered, ECOSTAT has modified its GDP forecast for the year: an approximately 4% growth in the gross national product seems likely this year, with a slightly higher economic growth of about 4.2% is anticipated for next year provided that countries with advanced economies grow at the rate specified above. In accordance with our earlier calculations, inflation will be favourable. Energy and food prices have been close to stagnation recently and with the price index of other products being moderate besides. The anticipated annual increase of consumer prices continues at about 9.3% for 2001. Given that there are a number of uncertainty factors, an annual mean inflation rate of 7.5% is expected for the coming year. It is predicted that, compared to the low base of the final quarter of this year, current performances will be difficult to exceed in the last quarter of next year.

The external balance has been better than previously anticipated. During the first eight months of the year, there was a deficit of only EUR 351 billion, just half the figure for the same period of the previous year (EUR 683 billion). The balance of trade has been favourable, the import growth rate being less than expected; revenues from the tourist industry have also been good although there was some decline in terms of conference tourism resulting from the adverse effects in the wake of the terror attacks. The deficit in the current account can consequently drop below the level forecast at the beginning of the year, to less than EUR 2 billion. Considerable capital movements, however, are likely to occur next year. In particular, one should note the remarkable expansion in the Central and Eastern European region of three Hungarian giants, MATÁV, MOL and OTP, each intending to acquire interests in companies with a similar scope of operation awaiting privatisation in neighbouring countries (or further away). These capital export transactions, as well as the profit withdrawal of multinational companies operating in Hungary may affect next year's balance considerably. Therefore, for 2002, the deficit in the current account is expected to be higher than this year, around EUR 2.8 billion.

Last month, a decision was made on the forint-based financing of the foreign currency debt. This measure had been motivated by the higher exchange-rate risk generated by the broadening of the exchange rate band; however, a higher supply emerging on the Hungarian government securities market may easily disturb the market equilibrium of government securities. Despite the central bank's promised cutting down on a part of its bonds portfolio-another step toward decreasing supply-a more significant fluctuation (decrease) in returns is expected in the long run.

On October 8, the National Labour Council reached a consensus concerning the increase of the minimum wage to HUF 50,000, which represents a payroll expense of HUF 71,200 for employers and a net wage of HUF 42,000 for employees. This measure may make life difficult for exporting SME's in particular, already significantly affected as they are by the burden of the broadening of the exchange rate band and with such a repeated increase in their expenses further worsening their position. Under the consensus, the parties affected are to receive compensation out of the Labour Market Fund to an overall value of HUF 1.5 billion, more than the subsidy of HUF 1 billion granted on the introduction, last year, of the minimum wage of HUF 37,750.