ECOSTAT NEWSLETTER
- January 2006 -

According to our valuation trend of growth and balance indices may work out reversely. Only stagnation or slow upturn of the balance indices is expected, while the dynamics of growth is accelerating.

The US economy expanded at a robust pace in 2005. Private consumption and investments experienced balanced growth. Consumer confidence indices show favorable prospects in the short run. Looking ahead, economic imbalances keep provide a worrying background on the expansion. Trade balance gave a negative contribution to GDP-growth last year. Rise of the federal funds target rate is likely to slow down.

In line with the cycle of the global economy, growth of the European Union reached its peak in the middle of 2004 than it started to decelerate. Economic growth accelerated slightly in the second half of 2005 again but its dynamics remained under the growth rate of the US economy. Growth of the New Member States strongly exceeded the development rate of the euro area, the convergence process is not supposed to loose momentum neither in 2006. Lowering the general government deficit will be a key issue in most of the member states in this year as well.

Including the methodological changes the Hungarian economy grew by approximately 4,2 per cent in 2005. Robust pick-up continued in industry in the fourth quarter of last year. Fundamentally the export volume was the main factor behind this solid growth. According to our business confidence survey domestic demand accelerated as well in the first quarter of 2006. Private consumption is projected to rise at an accelerating pace in 2006. Investments are tend to keep growing at a high rate. Accounting with slightly rebounding external demand export is to improve dynamically. On the whole GDP is set to expand by 4,4 per cent in 2006.

According to the GFS method the government deficit in 2005 was even more favorable than expected by the Ministry of Finances. Our main medium-term goal, introducing the euro requires to fulfill the public deficit convergence criterion accounted according to the ESA 95 method. To accomplish the Maastricht criteria and introduce the euro in 2010 as it is planned significant public savings have to be made. The ESA 95 method based general government deficit adjusted with the temporary effects of the pension reform and considering some methodological uncertainties may be around 6 per cent of GDP in 2006.

The inflation declined fairly in 2005, consumer prices grew by an average 3,6 per cent. Growing competition after joining the EU had an effect mainly on food prices, growth of price indices in this group of products stayed below expectations. This effect is projected to stay alive in 2006 as well. Annual consumer price inflation is forecast to decelerate sharply to 2 per cent in 2006. This is supported by the 5-per cent-cut in the VAT rate although accelerating rise of consumer spending means a possible upside risk.

The base rate of the central bank decreased to 6 per cent in 2005. Easing monetary policy was stopped in the middle of September because of the expectedly growing volatility of the Forint. For the present Forint stayed stable at around 250 HUF/EUR, it has not been weakend by the unfavorable expectations related to the budget deficit and the introduction of the euro. At the same time further lowering the base rate can hardly be taken place. In our view the base rate may be decreased to 5,25 until the end of 2006, but if any adverse monetary or fiscal circumstances may occur it is not impossible that the interest rate exceeds this level at the end of the year.