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After a sizeable contraction in 2009, GDP growth should progressively resume in 2010, and gather pace in 2011, on the back of a strengthening foreign demand and easing credit conditions. Unless the upcoming election year repeats past electoral profligacy, planned fiscal austerity should curb domestic demand. The unemployment rate will peak at over 10% in 2010 before falling slightly. The significant output gap and the recent appreciation of the exchange rate have dampened inflationary pressures, which should not increase before the recovery gains momentum.

A tight macroeconomic policy under the programme of International Monetary Fund and the initial success in reining in expenditure growth have boosted investor confidence, strengthened the exchange rate and provided room for a series of interest rate cuts since mid-2009. Scope for further easing will be determined by the credibility of continued fiscal consolidation and conditions in global financial markets. To maintain investor confidence, it is crucial that the government sticks to the newly adopted medium-term fiscal framework and supports the efforts of the new fiscal council.

Hungary faces a protracted recession

Real GDP has severely contracted during the first three quarters of 2009. Inventories plummeted and private consumption and investment slackened significantly, resulting in imports falling even faster than exports. Exports were somewhat buoyed by market share gains arising from a weaker currency. Manufacturing and construction output has remained flat, suggesting that the economy may have come close to bottoming out. Inflation measured by the consumer price index stood at 4.7% in October 2009, a slight pick-up from earlier figures due to value-added tax (VAT) and excise tax hikes in July. The unemployment rate had been held down by public and seasonal works programmes during the summer, but reached a 13-year high thereafter.


Financial market conditions have improved ...

The bailout package by international organisations boosted foreign exchange reserves and alleviated Hungary's financing difficulties in international markets. The easing of global financial market strains has also contributed to enhanced investor confidence, which was manifest in the successful issue of eurobonds in July 2009. In addition, the exchange rate has strengthened, providing room for a series of interest rate cuts in the third quarter of 2009. As a result, the debt service burden of indebted households, especially those with liabilities in foreign currency, was somewhat eased. The passthrough from the rate cut to the real economy has, however, been weak owing to high perceived levels of credit risk. Further monetary easing would make forint loans more attractive vis-a-vis loans in foreign currency, but the room for interest rate cuts is largely constrained by global risk appetite and the budget outcome ahead of general elections in 2010.

... as a result of austerity fiscal measures

The initial success in reining in expenditure growth played a major role in regaining investor confidence in Hungary. However, the series of austerity measures, including wage and pension cuts, have severely affected consumption, although the impact of VAT and excise tax hikes on consumption was somewhat mitigated because they were not fully reflected in prices, due to the weak demand and because firms' costs were reduced by social security contributions cuts. The major challenge is to maintain the momentum of fiscal consolidation. The medium-term framework for fiscal consolidation needs to be strengthened. In particular, the governments (national and sub-national) should stick to the medium-term objectives and the authorities need to bolster confidence by ensuring that the recently established fiscal council plays a prominent role in supervising the budgetary process.

After a bottoming out in 2009, growth will slowly pick up from 2010

After a sharp fall in output of about 7% in 2009, a slow pickup is expected from 2010, with growth approaching 4 1/2 per cent to wards the end of 2011. The recovery will be driven by stronger global demand and the resulting pick-up in business investment. Investment and consumption demand should be supported by easier monetary policy. Eventually, the shift of tax burden from labour to consumption will play an important role in boosting Hungary's growth potential. In spite of the temporary pick-up in CPI inflation as a result of the tax hikes, inflation is expected to be moderate, given the large degree of slack. Downside risks to this projection include an increase in non-performing loans that would further damp business investment and renew loss of confidence in the currency. A major upside risk is a faster than expected global recovery.
Hungary: Demand, output and prices

                                     2006         2007   2008

                                Current prices   Percentage changes,
                                 HUF billion     volume (2000 prices)

Private consumption                12 800.2        0.4   -0.5
Government consumption              5 423.2       -7.4   -0.8
Gross fixed capital formation       5 161.3        1.6    0.4
Final domestic demand              23 384.7       -1.2   -0.4
  Stockbuilding (1)                   536.0        0.0    1.0
Total domestic demand              23 920.7       -1.0    0.4
Exports of goods and services      18 329.7       16.2    5.6
Imports of goods and services      18 494.9       13.3    5.7
  Net exports (1)                    -165.2        2.2    0.0
GDP at market prices               23 755.5        1.0    0.6
GDP deflator                                       5.9    3.8
Memorandum items
Consumer price index                     --        8.0    6.0
Private consumption deflator             --        6.2    5.6
Unemployment rate                        --        7.4    7.9
General government                       --       -5.0   -3.7
  financial balance (2)
Current account balance (2)              --       -6.8   -7.1

                                2009    2010   2011

                                Percentage changes,
                                volume (2000 prices)

Private consumption              -7.8   -5.3    1.2
Government consumption            0.0   -0.9    1.0
Gross fixed capital formation    -6.6    0.2    4.1
Final domestic demand            -5.8   -3.1    1.8
  Stockbuilding (1)              -8.0    0.3    0.0
Total domestic demand           -10.1   -2.8    1.9
Exports of goods and services   -11.2    6.0    7.0
Imports of goods and services   -18.1    3.0    5.6
  Net exports (1)                 5.5    2.5    1.3
GDP at market prices             -6.9   -1.0    3.1
GDP deflator                      2.4    2.3    2.0
Memorandum items
Consumer price index              4.5    4.0    3.0
Private consumption deflator      4.6    4.5    4.6
Unemployment rate                 9.9   10.3    9.3
General government               -4.3   -4.1   -3.6
  financial balance (2)
Current account balance (2)      -1.6   -1.8   -2.6

Note National accounts are based on official chain-linked data
This introduces a discrepancy in the identity between real demand
components and GDP For further details see DECD Economic Outlook
Sources and Methods (http//

(1.) Contributions to changes In real GDP (percentage of real GDP
In previous year), actual amount in the first column.

(2.) As a percentage of GDP.

Source: DECD Economic Outlook 86 database

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Publication:OECD Economic Outlook
Geographic Code:4EXHU
Date:Nov 1, 2009
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