ECOSTAT NEWSLETTER
- January 2008 -

Monthly Forecast, January 2008.
 

According to our forecast economic growth this year in Hungary will be determined by

• low domestic demand because of the impact of the austerity package,
• slowdown of the global economy, and
• uncertainties on the financial and capital markets

On the low basis of 2007, GDP may grow by 2.8-3.0 percent this year. Further decrease of real wages is not expected and private consumption may show some pick up. Impact of the government's austerity measures will be slighter in 2008 than last year. Growth rate of export and import will decrease, improvement of trade balance is expected to lose momentum. In 2008 investment activity in the corporate sector still looks uncertain. Due to EU subsidies investment in equipment, machinery and technology, as well as in infrastructure is expected to gain momentum this year. Positive impact of European transfers on gross fixed capital formation may prevail from the second half of the year. Given the very low basis of 2007, high capacity utilization in manufacturing, increasing number of postponed investments and slight acceleration demand are the basis of our forecast.   

From the production side export performance of manufacturing industry contributes primarily to GDP-growth. Some 80 percent of Hungarian export is generated by corporate enterprises. Their export performance is highly determined by European business cycle, especially that of Germany. If the euro zone expands at a smaller than expected rate due to U.S. recession and turbulences in the financial markets, Hungarian economic outlook could worsen, especially because moderate export demand can hardly be balanced by domestic purchasing power.

In the mirror of stabilisation measures deficit reduction objectives of the government are expected to be realized. Hungarian budget deficit (taken into account by ESA methodology) can be reduced to 4.0 - 4.3 percent of GDP this year. Improvement of the balance derives from revenue increases (one third) and expenditure reductions (two thirds).

Forecasts on the international business environment are considered to be unfavourable for both Hungarian and global economy. Negative outlook is founded on the slowing of real economy and uncertain of financial markets. U.S. recession and fear of its spill-over effects has caused panic on stock exchanges. Regarding forecast for global economic growth the most important question is how the world economic performance depends on the U.S. economy. The engine of the world GDP-growth is mainly the U.S. economy and the fast expanding Asian economies, especially China and India. These two regions are strongly interrelated, mainly due to intensive external trade. Proportion of U.S. trade with Europe declined in the last decade, but still 25 percent of EU-27 export goes to the American market, resulting in the largest surplus in the European trade balance. U.S. economic slowdown or a recession will affect European GDP-growth through real economy and financial markets as well.

U.S. recession is generally explained by the real estate and sub prime mortgage crises, however these can be considered rather as symptoms than basic problems. Economic cycles of the world economy have been changing. Global economic growth was extremely high in the past 4-5 years. Fast economic growth was heated principally by high American borrowing- financed private consumption. Correction of non-real based growth seems to be inevitable. In January 2008 oil prices jumped to new record hights and then dropped below USD 90 due to fears of economic slowdown. Price of other commodities such as metals represented a similar trend. In the first three weeks of 2008 the possibility of an economic slowdown is rising. As a result of risk aversion of investors, US dollar strengthened to 1.45 against the euro.

In Hungary the rate of consumer price increase will decrease in 2008, the annual average inflation rate is expected to be about 5.5 percent. As it is shown by CPI-projections overshot last year, trend of disinflation was broken at the end of 2007, CPI came to 8.0 percent as a yearly average. Price elevating impacts are expected to prevail in 2008. Second-round impacts of the increase in agricultural, food and raw material prices, also those of a potential financial and capital crisis and of a general recession may lead to persistent weakening of the forint resulting in a higher than expected inflation.