ECOSTAT NEWSLETTER
- September 2003 -
 

ECOSTAT's september annual forecast

According to ECOSTAT Gazdaságelemző és Informatikai Intézet, the performance of the Hungarian economy in the first half of 2003 has fallen behind the planned level and the prognosis. In the meantime, increasingly more signs indicate that the world economy begins to shift from recession, however, the effect will become manifest in the domestic economy only after a delay.

Next year's economic policy in Hungary will be determined by efforts made at reducing the state budget deficit. Decrease of the deficit will directly affect, in addition to cutting down on social expenses and altering the factors influencing competitiveness, public administration.

In the United States there has been a rise on the confidence indices measuring the prospects of the economy for months. Compared to the data of the European Union, the expected high, 2.5 percent, rise this year is primarily due to the dynamic growth of defence expenses. The budget deficit has, in the meantime, doubled compared to planned figures, by the end of the year the deficit is expected to exceed USD400 billion. Companies' investments have significantly risen in the second quarter, which may form the basis of next year's growth. It is a question to what extent and how fast the widening of the overseas economy can ripple across world economy.

The European Central Bank continues to consider the inflation rate around the 2 percent index number successful; on the other hand, prospects for growth have not improved significantly. The exchange rate of the EURO to the US dollar is expected to weaken in the coming months - simultaneously with the strengthening of the US economy. All this may advance the improvement of the Union's competitiveness and picking up in German exports.

Hungary's economic output is determined basically by international processes, which have not favoured balanced development this year either. In the second quarter of 2003 the gross domestic product has slowed down to 2.4 percent, after the 2.7 percent production enhancement in the first quarter. Aggregate investment in the first half of the year has not grown, however, production investments have widened. The structure of investments has improved, and this serves sustainable growth in the medium term.

The widening of private consumption in the second quarter of 2003 has somewhat lessened, however, its dynamism continues to significantly exceed the growth rate of the GDP. Consumption is still urged by the effect of rise in real earnings spreading across from last year, and for the time being there is no sign of the savings rate attaining 3 percent as prognosticated. According to our calculations, the growth rate of private consumption will lessen during the rest of the year; it will attain an annual average of approx. 6-7 percent. Next year we expect the index to further decrease.

Taking the above circumstances into consideration, at an annual level, we can calculate with 2.8 percent increase in the gross domestic product, and we presume 3.5 percent development rate in 2004. The acceleration of economic development will spread across to 2005.

In the past two, two and a half years the growth rate of exports has lessened, domestic consumption has been to an increasing extent covered by imports; domestic entrepreneurs have lost ground also in the domestic market. In the first half of the year, the working capital inflow has dropped to the lowest point, direct investment arriving in the form of proprietary share has been hardly half of the value in the former year; on the other hand, working capital export has increased. The external balance has significantly worsened, the balance-of-payments on current account deficit is expected to be approx. EU4 billion this year and EU3.4 billion next year.

The evolved high-level state budget deficit cannot be maintained in the long run. It is a key priority of economic policy to significantly lessen the budget deficit. And this, in addition to reforms necessary also for the success of the accession to the EU, requires serious adjustment in the economic policy. State budget deficit reached an extremely high level in 2002, which resulted from a rise in expenses rather than lack of revenues. In the budget plans for 2004, it is of key importance to reduce expenses and to increase revenues as much as possible.

Almost half of the Ft600-700 billion savings necessary to attain the planned 3.8 percent deficit next year is covered by the lowering of public administration expenses, and, reduction of personnel, which constitutes one of the elements of this measure. In view of the rigidity of the system, rationalisation can be carried out with serious risks.

The exchange rate of the Hungarian forint has slowly strengthened in the past month, the proportion of foreign capital has continuously risen on the state securities market. After the lowest point in June, investors' confidence is again strengthening. The note bank continues to hold the interest at 9.5 percent, calculating with our currency's further strengthening until the end of the year, however, a half percentage point relaxation can be also conceived.

Changes in price rise in August met expectations. We expect the price index to rise until the end of the year, primarily because of food products becoming more expensive. We expect 4.7 percent average annual inflation. In 2004 the modification of VAT rates will cause approx. 1 percentage point surplus. We prognosticate approx. 6 percent price rise next year.