ECOSTAT NEWSLETTER
- April 2007 -

ECOSTAT's April annual forecast
 

According to the forecast of Ecostat along with solid European economic growth and moderate domestic demand Hungarian economic growth is decreasing this year. State balance goal of the Government seems to be insured in 2007. The fiscal correction results in lower budget deficit, favorable international business cycle helps to reduce Hungarian external imbalances. Inflation rises in the first half of the year because of one-off measures. Later on it shall be easing, until December 2007 inflation rate would fall to around 5.5 per cent.

Hungarian economy keeps being boosted by exports. Growth of our export sector is fuelled by European economic boom. Export is increasing faster than import this year again, trade balance is improving. In the first two months of 2007 value of export of goods increased by 22 per cent, while value of import rose by 20 per cent. Deficit of balance of goods was less with some 100 million euros as it was in the same period last year. Based on the processes of the first two months we think that Hungary's external trade increase will be more dynamic in 2007 than we'd expected before.

The present world economic cycle reached its peak in 2006 when world economic growth exceeded 5 per cent. Dynamism of the international economy has been undiminished in spite of the temporal imbalances. Growth is driven by convergence of developing countries, mainly those of the Asian region, and by domestic consumption and capital import of the United States of America. Price of crude oil stabilized at about 60 USD in the second term of 2006. According to our expectations crude oil prices will stay between 60-65 USD in the entire year.

Domestic demand will be weak this year in Hungary. Correction measures will lead to a lower private consumption and even investments will tone down. These effects may be attenuated by accelerating growth and the dynamic increase in export demand of the European countries. In the past few years net export contributed more and more to the Hungarian GDP growth. In 2006 3.4 percentage points from the 3.9 per cent annual growth rate of GDP came from external trade. Downturn in investments last year is going to be compensated by transfers from the European Union in the coming years. Actual payments of EU-transfers are gathering pace, and after consultations Brussels is likely to accept the strategic goals of the New Hungarian Development Plan. First tenders were handed to Brussels in January; proposals related to the regional programs come up in late May. Growth in 2007 will be significantly affected by household demand, which will be lower with some 1 per cent than it was last, according to our estimates.

Hungarian economic performance is growing only by 2.4 per cent this year. Industrial production develops with a similar strong pace like last year. In the first two months industrial production grew by 10.8 per cent, its growth was 0.4 per cent on a monthly basis in February. Orders in the manufacturing branches are higher than last year's. Total export orders grew by 32 per cent, domestic demand rose by 7 per cent. Annual growth of industrial production is expected to be 8.5 per cent. There will be a slight downturn in the construction sector and sales of real estate and flats are slowing down. Agricultural production is expected to approach last year's performance. Former high growth in the volume of retail trade decreases significantly and converges to Western European rates. GDP of the service sectors will rise a few tenths percentage points higher than it was expected.

In the first three month of 2007 consumer price index increased significantly. It reached 7.8 per cent in January, 8.8 per cent in February and 9.0 per cent in March. According to our expectations inflation rate is not lifting higher, and from late summer it is reducing gradually. As we expect inflation rate shall be 7.4 per cent in 2007, than it may decrease to 3.6 per cent the next year.

The Hungarian National Bank base rate has been 8 per cent since October 2006. Based on the real processes from the middle of the year the base rate may decrease, until the end of the year to 7 per cent or beneath. The Hungarian Forint/Euro exchange rate decreased from mid 2006's 280 to 250 in the first quarter of 2007 and since mid April it looks to be stabilized at 245. In the rest of the year Forint will be around the strong boundary of the band.

Reduction of financial claim of the budget seems to be secured in 2007. Most of the planned measures of the New Stability Program are imposed. The budget deficit per GDP ratio can decrease to 6.6 per cent, but with a higher than expected growth rate and inflation the deficit can run below the forecasted level as well. The Austerity Program, the price control cutback, the growth of tax and contribution revenues and the improvement in the Health Insurance Fund balance shall result in deficit reduction. According to our view it is essential to push through the reform procedure consistently to fulfill the Convergence Program.