The Hungarian economy in 2006

In 2006, Hungarian economy slowed down somewhat when compared to 2005: Kopint Datorg estimates a GDP growth of 4% for the year as a whole. During the first three quarters, Hungarian economy expanded by 4.2%. In spite of favorable business cycles, the three percentage points difference between the growth of the eurozone and Hungary diminished to 1.5% percentage point. Also among the Visegrad countries, Hungary was the slowest growing one.

On the consumption side, investments lost their driving power in the second quarter. A determinant factor of growth was the dynamic expansion of exports of goods and services. Private consumption growth slowed down during the year, and it remained under 1% in the third quarter, which was mainly due to deceleration in real wage growth.

Investments decreased by 0.3% in the first three quarter. During the past years, there was no similar situation, when investment diminished in two consecutive quarters. Transport and communication investments grew the fastest, by 13.5%, which is much below their 40% growth in 2005. Meanwhile, manufacturing investments went down by 6%, which is a sign of uncertain expectations of the firms as a consequence of the stabilization measurements of the old-new government elected in May 2006.

On the production side, industrial value added increased by 9.1% in the first three quarters. Agricultural production, as well as construction suffered a fallback, by 7.3% and 2.1%, respectively. The growth of the service sector slowed down to 3.6%; only financial intermediation performed better than average.

While in the third quarter, increase in the number of active continued, the number of employed went up by only 0.1% from its level in the second quarter. Nevertheless, this increase is mainly due to the cease of fake employment contracts. As a consequence, unemployment rate grew further, to about 8%. Net nominal wages increased by 8% in the first nine months of 2006, however, the dynamics slowed down in September. Net real wages grew by 4.8% during the same period. Although as inflation accelerated, net real wages already decreased in September. In the private sector, especially in the financial sector, net real wage growth was a bit faster than average.

Households' consumption grew slightly slower than their income, which is supposed to cause a rise in savings. However, households' loans also increased fast, so net saving diminished by 15% in the first three quarters, when compared to he same period of 2005. Especially loans on flats and houses experienced a dynamic growth.

2006 was a successful year for the Hungarian external trade. Expansion of exports of goods reached 15.6%, measured by unchanged prices. Meanwhile, the corresponding value for imports was 11.3%. As a consequence, trade deficit diminished and it remained somewhat below EUR 2 billion. Especially foreign trade with the old EU members accelerated. From Asia, imports of inputs necessary for production, while from other non-EU member European countries, imports of energy products grew significantly. Among exports, industrial products (especially machinery and transportation products) performed well, while exports of food as well as raw materials was rather sluggish. Meanwhile imports of foods speeded up, which means, Hungary was only partly able to take the advantage of the accessibility of the EU markets.

The cumulated current account deficit of the first three quarters reached EUR 4 billion (6.3% of the GDP), which is EUR 600 million less compared to its level in the corresponding period of 2005. Trade deficit shrank from EUR 1142 million to EUR 632 million, due to above-mentioned reasons. On the other hand, deficit of incomes became larger. The main reason was the large amount of non-residents' dividends transferred home in the second quarter. In the first three quarters, foreign direct investments of EUR 1,857 million arrived to Hungary. This is almost exactly the same amount as in the corresponding period in 2005. However, in 2005, the sale of Budapest Airport resulted in a huge capital inflow in the fourth quarter, which did not repeat in 2006. Thus, in 2006 as whole, inward foreign direct investments most probably decreased.

In the first nine months of 2006, 6% more foreign tourists arrived to Hungary than in the same period of 2005. However, this increase is due to the fact that the number of tourists staying only for one day increased significantly. Foreign tourists spent by 5% more than last year, although this was due the relatively cheaper forint in 2006. The number of Hungarians traveling abroad as well as their time spent there experienced a fall in 2006. Also they spent much less, by 14%.

In October, the general government performed slightly better than it had been previously expected by the Ministry of Finance (MoF). The combined deficit of the central government, extrabudgetary funds and social security funds amounted to HUF 52.4bn (in contrast to HUF 62.8bn projected). Deficit of the first 10 months without local governments was HUF 1509.6bn, corresponding to 6.49% of the GDP according to the MoF's estimate. Based on this, annual deficit would be 7.3% of the GDP if debt assumption from the National Motorway Co., originally scheduled for 2007 had not taken place this year. As debt assumption amounts to 1.5% of the GDP, cash-based deficit of the general government is to be 8.8% this year, without local governments. If local governments are included, cash-based deficit is expected to be 9.5% of the GDP, corresponding to 10.1% ESA'95 deficit (the so-called ESA bridge being 0.6% of the GDP).

Inflation rate was 3.9% in 2006 as a whole, which is somewhat higher than its level in 2005 (3.6%). Inflation was decreasing in the beginning of the year, and in March and April, it reached its historical bottom since the transition: 2.3%. The rise of prices suddenly accelerated in September, when the prices of food as well as electricity and gas jumped up significantly. Thus, 12-month inflation reached 6.5% in December. In 2006 as a whole, also prices of the above mentioned two commodity groups rose the fastest: food prices by 7.7%, prices of electricity and gas by 6.4%. On the other hand, prices of consumer durable goods diminished further, by 4%, and also prices of clothing and footwear went down. Core inflation remained below the consumer price index (CPI), however, after being only 0.5% in January, it went up to 5.0% by December. The price index calculated with unchanged taxes showed a slightly increasing trend during the year, which indicates that the low levels of inflation was mainly due to the tax cuts in January 2006.

During 2006, the HUF-EUR exchange rate showed much larger volatility than in 2005. From its level of about 250, the exchange rate suddenly depreciated near to 270 in the Spring, right before the Parliamentary elections in May. After some stabilization of the exchange rate, it started to rise again and reached a historical peak above 280 in the Summer. In the last three months of the year, a gradual appreciation happened, and by the end of December, one euro worth only slightly more than 250 forints. As a reaction for the developments in inflation and the exchange rate market, the National Bank of Hungary (NBH) raised its base rate in the second half of the year gradually, from 6% to 8%. Government bond yields followed a similar pattern, with the difference that there was almost no rise in the yields in March, when the forint depreciated the first time, however, in June, bond yields went up by 150-200 basis points.

The performance of the Budapest Stock Exchange was not as good as in 2005. The BUX index was rowing in the first four months of 2006, and in May, it registered a historical peak of 25,300 points. However, after that it fall below 20,000 points (which it broke through in August 2005). In spite of further uncertainties in the financial market, the index was increasing again in the second half of the year and managed to reach 24,800 points by the end of December. Out of the blue chips, Hungarian Telekom and OTP were practically stagnating; while MOL followed the same pattern as the BUX index. One of 2005's best performers, Richter showed a large volatility, rising and falling 20-30% within the year. Finally, by the end of December, Richter stood only slightly above its level in January.

Forecast for 2007

In 2007, Kopint-Datorg forecasts a GDP growth of about 2.8%. The slowdown is mainly a consequence of the stabilization program of the government. However, these effects will be compensated somewhat by favorable developments in external trade. After stagnation on 2006, Kopint-Datorg expects the investments expanding by 1%. This assumes that although state investments will be falling, private investments' growth will gain new buoyancy.

As a consequence of severe rise in regulated prices and public transportation tariffs, as well as changes in taxation, in inflation is expected to go up to about 6.4%. Net nominal wages will increase about 3% in 2007, which indicates a decrease of 3.5% in net real wages. Saving rate might increase from 4.7% in 2006 to 5% in 2007.

As a consequence of the stringency measurements of the government, employment will not improve. Unemployment rate will reach an average of 8%, while the increase in the number of active also might come to a halt.

Besides exports growing faster than imports, terms of trade is also likely to improve, which will result in a fall of the trade deficit to EUR one billion. The 6.8% deficit of the general government planned in the budget seems to being met; however, deficit of social security funds might represent a potential risk. Kopint-Datorg expects a stronger HUF/EUR exchange rate, an average of 255. A more significant fall in government bond yields and interest rates is expected in the second half of 2007.

source:Kopint-Tárki zRt