ECOSTAT NEWSLETTER
- May 2008 -

Monthly Forecast, May 2008.
 

The business cycle of world economy has been decreasing, growth rates are slowly and continuously falling. Due to the credit crisis and the setback of global demand, international organisations are downward rectifying the 2008 world economy growth rate forecast. Although recession is not threatening, growth is, however, continuously slowing down after the past two years' peak. It is a stronger trend in developed countries than in countries catching up. Forecasts concerning the development of the USA, Japan, and the European Union are fairly low. The institutions are predicting global growth for about 5 percent. According to the IMF forecast growth in the Euro-zone will slip back from last year's 2.6 percent to 1.4-1.6 percent this year, and to 1.2 percent next year. German growth will scale down to 1.4 percent this year and to 1 percent next year, after the 2.5 percent growth in 2007. In the European emerging countries the rate of economic growth has decreased by several percentage points in the first three months of the year, and the signs of slowing down are clearly visible in Asian countries as well.

Along with the business cycle, rate of consumer price increase jumped in all countries of the World. Inflationary pressure, resulting from the price increase of raw materials and oil, has been around since 2004, and the strong rise in food prices has started in 2006. In the past year, between June 1. 2007, and June 1. 2008, the price of WTI-type petroleum has doubled, from 65 dollars to over 130 dollars. Wheat costs 40 percent more than one year ago, but in February 2008 on its peak level this year, it costs twice as much as a year ago. Due to inflationary shocks inflation rate of the Euro-zone has jumped to 3.6 percent, a level that has not been seen for 16 years. While in developed countries the jump of inflation is maximum a few percentage points, in developing countries consumer prices increase with much higher percentage points.

Hungarian economy in 2008

The austerity package of the Government has reached its main goal in 2007. Its balance correcting effect worked, both budget and current account balance improved more than planned. The GDP growth rate significantly sank in the second half of the year and in the first quarter of 2008, it plummeted under 1 percent. Due to international inflationary pressure deflation process has slowed down, last year's inflation exceeded the planned rate with 1 percentage point.

In 2008 the financial balance of the state budget may be more favourable than calculated, the 4.0 percent goal can be reached. This year's estimates will be realised as a result of elements different from that of last year (implementing reforms, the falling out of single factors). Balance indicators may be more favourable than expected meanwhile economic growth will only slowly pick up, and the strengthened wage growth will slowly slide. The main risk of growth are external demand and inflation. According to the calculations of ECOSTAT the economy will only recover in the second half of the year. The slow rate of growth is mainly caused by the setback of the global economy, and internal consumption and accumulation are also only slowly increasing.

Economic growth in 2008 can be more than twice as much as it was last year. The forecast of agricultural output seems optimistic, weather conditions are so far favourable. The revival of the building industry can be stated with great certainty. Private consumption will slightly increase, investments will gradually grow. International prosperity, however, will decrease, its effect will be negative, but it is difficult to estimate its rate. In spite of the mixed expectations, due to the strengthening of the building industry after suffering many losses, and the improving agriculture, we expect about a 2.6 percent growth, which is more favourable than it was last year.

The factors of economic growth are changing. An important component of economic growth is the upswing of the foreign trade balance, and its tendency-forming role will remain strong. From the point of Hungarian export possibilities it is favourable that the export is shifting towards dynamically developing new Member States and to countries outside the EU. According to the calculations of ECOSTAT, export will increase with 11.2 percent, and the import with 10 percent.

The anti-recession role of private investments in producer sectors will gradually strengthen. Investment activity is expected to revive from the second half of 2008, at best the investment rate can reach 4.2 percent in 2008. The development expenditure of the NHDP (New Hungary Development Plan) appeared sporadically, and the EU-development funds, started in recent years, increased the narrow home sources. The technical combination of investments is steadily favourable, the volume of the development of machinery and devices rose with 8.4 percent in the first quarter, building investments, however, are 15.5 percent behind last year's. The decrease of the performed value in the case of building investments is in connection with the setback of motorway- and road constructions.

The negative effect of the drop in private consumption will cease, the slow growth in consumption will improve growth prospects. Taking into consideration all these factors we are calculating an over 3 percent GDP growth for 2009.  The state budget deficit may be decreased to 3.2 percent and according to the signs the reduction of the deficit laid down in the Convergence Programme can be accomplished. In spite of the moderate economic growth, inflation will be higher then earlier expected.

In the first couple of months of 2008 the rate of inflation slowly scaled down, the first quarter reached an average 6.9 percent. The first wave of last year's inflationary shocks is coming to an end. On the other hand an international inflationary pressure resulting from international price trends (energy, raw material, foodstuffs) has become strong. According to our calculations, the annual average rate of the consumer price increase will be around 6 percent.  By December the inflation may decrease to 4.5 percent. Investment activity will prospectively recover from the second half of 2008. Under fortunate conditions the investment rate may reach 4.2 percent. The result of the funds provided by the NHDP can be felt more and more. In 2008 the gradual improvement of the developments can be expected, the growth will be manifested in the manufacturing industry and in infrastructural developments, including public healthcare, education, and environmental protection as well.

All in all, the 2008-2009 risks are not on the side of balance, but on the side of growth and inflation. The main uncertainty comes from world economy. The rate of changes seems manageable, and by 2010 the Hungarian economy may develop among balanced circumstances. Economic growth can even reach 4 percent in 2010.

Please kindly note that overall analysis for the Hungarian economy and updated forecast will be published in our quarterly publication, MONITOR, on June 26. 2008.