Growth and balance in the national economy of Hungary
- July 2005 -

In the first quarter of 2005, the gross domestic product has increased by 2.9 percent compared to the same period in the previous year; the growth corrected by calendar effects has attained 3.5 percent. Compared to those of the last year, the growth rates have somewhat decreased; the service sectors have attained 3.6 percent growth, while the production sectors have enlarged their material free production by 1.5 percent.

The structure of the growth of the economy has not changed on the merits; the growth of imports and investments continues to represent a drawing force, while private consumption is widening at a moderate rate. The slowing down of external demand has unfavourably affected the exports controlled economy. In the Euro zone the GDP has increased only by 0.9 percent in the first quarter of 2005. The rate of both the exports and consumption has decreased in the region using common currency. The almost two percentage point rate difference between the Hungarian and the Euro zone economies, however, has continued to hold; domestic economic indices fit the growth path determined by the level of our development and the international boom.

Domestic utilisation has picked up in our country; its extent, however, has not been able to make up for the decrease in demand due to the lower growth in the European Union. The dynamics of fixed assets accumulation has somewhat decreased, it is still more than the double of the GDP. Although the moderate growth of private consumption has not urged the growth of the economy, it has not raised external deficit either.

The growth rate of the foreign trade turnover has dropped by half compared to the previous year. The trade deficit has somewhat decreased; the extension of exporting has exceeded that of importing in the first four months; according to corporate surveys this tendency will not change in the short term. Our exports are primarily based on exporting processing industry products. A significant part of imported products are brought, after further processing, to the European markets. Therefore, the slowing down of importing can forecast the decrease in exports too, which is, however, not supported by recent order book data.

The widening of the industrial production in the first few months, on the other hand, has not even reached one third of the approx. 10 percent rate of the previous year.

In the first quarter of 2005, the volume of merchandise exports has increased by 8 percent; the volume of merchandise imports by 5 percent compared to the similar period last year. The reason for the drop of the rate of importing this year is that last year's outstandingly high growth rate in the goods group of machines and transport means representing the highest proportion has not been repeated, although extension has been achieved even compared to the very high base. The growth rate of machines and transport means, which also represents a significant part of importing, has decreased; primarily due to the lower demand for imported part units, spare parts necessary for production and exporting. The importing of processed products has been reduced by the lower consumer (private) demand. The volume of the GDP based exports and imports, which include services, have exceeded the level in the first quarter of 2004 by 6.2 and 4.8 percent respectively. According to Ecostat's model calculations, in 2005, the volume of exports and imports indicated in the GDP balance can grow by 6.9 and 6.3 respectively, considering the present moderate international boom.

After its output in 2004, the momentum of building industry has not broken in the first quarter of 2005; its output has extended by 11.7 percent in the first three months of the year. The development of building industry is apparently urged by infrastructural investments getting more extensive due to efforts to keep abreast with the rest of and the resources increasing effects of the financial supports given by the European Union. The widening of building industry production this year can exceed that of last year. Under conditions changing quickly and significantly, we estimate its growth in 2005 at 7-9 percent.

The output of agriculture in 2005 can get close to that of last year, which was considered outstandingly good, when the gross produce calculated at unchanged price grew by 22.6. Production prospects in cultivation of plants for 2005 are favourable. The problems of animal husbandry have not lessened. According to preliminary indications, the volume of production will not considerably decrease this year; the settlement of the payments of supports will improve the earning power of husbandry. A key source of tension for the branch is proper and timely warehousing of the produce, which is expected to be rich this year too.

At the beginning of 2005, revenues from foreign guests visiting Hungary have continued to increase. In the first four months, commercial points providing accommodation have received 770 thousand foreign guests, who have spent 2.2 million nights in our country, 9 percent more than in the same period last year. Domestic tourism has become lively at a lower rate than that. Commercial points providing accommodation have increased their proceeds by 16 percent, including catering. Consumer prices in tourist industry have grown by 6.7 percent on the average in one year. Taking into account that interest in the Central- Eastern region, including our country, has risen, we expect the favourable tendency to continue during the whole year, and revenues from and surplus in the balance of tourism will contribute to improving the external balance to a greater extent than last year.

The growth rate of our economy in the aggregate can be considered balanced; prospects are mixed; development depends basically on how external demand picks up, and how we can make use of the possibilities arising from that. In the second half of the year we expect the growth rate of the economy to improve, so the GDP can increase by 3.5 percent annually on the average.

The growth rate of exporting will continue to exceed that of importing, so we do not expect the external balance to worsen in 2005. Questions are formulated primarily regarding the funding of the balance-of-payments on current account. The current deficit in 2004 exceeded Euro7 thousand million. According to our prognosis, in 2005 the balance-of-payments deficit will be again around Euro7 thousand million.

In 2004, the structure of financing changed significantly; it moved in a more favourable direction, towards non-debt generating items. After the accession to the European Union, direct foreign capital investments apparently grew, and in 2005 we expect further growth. Because of the high interest rate that has evolved, the portfolio investment capital flown into our country can "start" to move after the changes in the second half of the year. While in the earlier months, primarily international economic conditions, rising interest rates were determining on domestic money markets; in the second half of the year the attention of foreign investors were focused basically on domestic economic policy processes, first of all on the changes in the state budget deficit.

The degrading of the stock of debts, and the fact that the deficit of the central budget in June has reached 90 percent of the yearly plan, are by all means unfavourable news for investors. Investors' decisions are significantly influenced by the lack of transparency. Changes in methodology, the settlement of the accounts of motorway funding outside the budget further decrease transparency. Current modifications of tax regulations on the agenda also make it more difficult for investors to see clearly. Presumably, the deficit cannot be reduced by minor modifications of the tax regulations and administrative measures; there are no more means left in this respect.

The annual deficit can probably reach 4 percent of the gross domestic product. All this is favourable compared to the high deficit index of the previous year; it is, however, higher than the pre-set optimistic purpose.

The year 2005 has started favourably in terms of inflation. In January consumer prices rose to a much lower extent than expected. In the first quarter of the year, moderate price increase has continued, the 12-month price index has remained under 4 percent. In May, prices grew by 3.6 percent, after that slow rising can be expected. According to the note bank's estimate in May, which seems to be unfounded, 3.3 percent price increase in the last months of the year can be prognosticated, while according to the consensus reached by the analysers of Reuters 3.9 percent rise in prices can be foreseen. According to the prognosis of Ecostat, the consumer price index in December can be around 4 percent; we expect 3.8 percent annual rise in prices on the average. We do not forecast considerable changes, significant fluctuations in inflationary processes in 2006.

In 2005, following the EU growth indices becoming slower, a lower GDP rate can be expected in Hungary too. The structural tensions of the economy, however, did not grow in the past one year. On the other hand, the transformation of the state budget supported by concepts cannot be postponed, which is indispensable also because of the reassuring funding of the high external deficit.

In the first quarter of 2005, the dynamics of private consumption has decreased to 2.2 percent, and so its extent has continued to remain below the growth rate of the GDP. It supports the lasting decrease of consumption that last year private net savings increased by 2 percent of the GDP, and this moderate growth can continue this year.

Only to a low extent do market players deviate from the strict income policy announced for the sake of the balance of the macroeconomy. The growth of real earnings, the extent of which is still exaggerated, is not followed by a rise of private consumption at a similar rate. Increasing unemployment, more uncertain future prospects force households to save. All this can, through the lessening of imports aimed at consumption, reduce the trade balance deficit. According to our calculations, in 2005, the household end consumption will grow by 2.6 percent annually on the average, and will accelerate to a low extent next year.

Looking a bit further ahead, the growth rate of the economy in 2006 can slightly rise, and reach 3.9 percent. The widening of exports will continue to ensure growth, which basically depends on changes in the international boom. On the demand side, private investments and consumption can also urge production and domestic sales. The dynamics of our GDP based foreign trade turnover can be around 8 percent because of a slight boom rise; the growth rate of exporting and importing will remain balanced.

Private consumption will continue to stay below the growth rate of the GDP, and will be probably 3.1 percent. Private savings will continue to rise at a moderate rate next year, and will increasingly help to finance state budget deficit and a part of investment credits from domestic resources. All this can further reduce the balance-of-payments on current account deficit, the amount of which in 2006 will be probably approx. Euro6.5 thousand million. As a result of EU transfers, the growth rate of gross fixed-assets accumulation in 2006 can exceed 7 percent. The state budget deficit - under favourable conditions - can improve by approx. half percentage point.