ECOSTAT NEWSLETTER
- November 2002 -
 

The ECOSTAT Institute of Economic Analysis and Information predicts that several risk factors will be stronger next year due to increasing internal and external deficits by the end of 2002. There is a need for a tight harmonisation of monetary and fiscal policies in 2003 in order to add dynamism to the economy while simultaneously keeping inflation under control. The at times overly strict monetary policy and temporarily relaxed budgetary policy will obviously converge on one another.

There are still no signs of any livening in the world economy. The weak results in the real economy and the simultaneous deterioration of fiscal conditions have necessitated the application of sensitive economic policy both in Europe and in the United States.

The Fed, fulfilling its role as America's central bank, reacted to protracted disinflation with an interest rate cut of half a percentage point. Although there is no inflationary pressure in the economy -so relaxation of monetary policy is an acceptable step - this correction of fifty base points exceeded expectations. In particular it has placed the already weakening exchange rate of the American dollar at a disadvantage.

The economic growth of the European Union in the second quarter was up on the 0.3 percent of the first quarter, expanding by 0.7 percent, but industrial production fell back over the past year and the rate of slowdown moderated. Inflation remains above 2 percent, which vindicates the stringent monetary policy of the European Central Bank. Meanwhile, a smaller fall in interest rates can be expected before the end of the year in order to increase demand.

In Hungary GDP growth of approximately 3.4 percent can be expected in the third quarter, a moderately rising growth rate. A growth rate of 3.3 percent is thought probable for 2002 as a whole. We predict 4 percent growth in added value for 2003 with a livening of export demand alongside some correction in consumption.

The fluctuation in industrial production continued through the autumn, and after 2 percent growth in September, it increased by 11 percent in October against the same period last year. Exports remained the key catalyst for growth. We expect a growth dynamic of around 3 percent for the year as a whole and anticipate a gradual increase in the dynamism of industrial production for the year ahead, and predict growth of about 5 percent.

The state deficit exceeded 800 billion forints in October and could approach 1500 billion forints by the end of the year, which represents 8.7 percent of the nominal GDP. The steep rise in the deficit is partly due to the switch to the ESA95 methodology and partly to some expenditure being brought forward from next year to this. Although to this extent the deterioration in the balance has created a fresh start for next year, it is perilous from the perspective of foreign capital investment. At the moment, the various players in the economy still trust in the planned deficit decrease and thus demand continues to grow in the state bonds market (although high interest rates have also had a huge role in that). Nonetheless, a smaller imbalance will be enough to turn this tendency around next year for growth in country risk. Consequently, it is essential to establish fiscal discipline in the coming year, which needs to be accompanied by greater transparency. The growing deficit, mostly because of the lower growth rate, could reach 5 percent of GDP.

The current balance of payments deficit worsened in September, far more than expected, and is approaching 2.5 billion Euro. Over the rest of the year the deficit will further increase and, due to the increase in the end of year income transfers, will exceed 3 billion Euro in 2002. As a result of the high import demand of the Hungarian economy the growth in exports renders a further deterioration in the balance likely for the year ahead. In 2003 the deficit, calculated with the methodology currently in use, could come to 3.5 billion Euro.

The half percent drop in interest rates from the central bank on the 18th November represented some relaxation in monetary policy. The regulated interest rate was decreased from 9.5 to 9 percent in the footsteps of international economic policy. The achievable interest rate premiums in Hungary grew as a result of falling interest rates in not only the United States and in European Union countries, but also in Eastern European countries. The inflationary target could be held on the strong side of the band at 11-12 percent off the average, and in consequence further falls in interest rates could also be possible early next year.

The consumer price index in 2002 is expected to be around 5.3 percent. The interest rate fall will no longer influence this year's inflation rate significantly. In 2003 we do not anticipate any strong disinflation. We estimate price increases to stand at 4.9 percent as an annual average.