GKI expects Hungary's economy to grow 1 percentage point faster than the EU average

Economic research institute GKI expects Hungary's economy to grow 1 percentage point faster than the EU average in 2011, although Hungary will only overtake Slovenia and Romania within the CEE region.

The assessment of the Hungarian economy will depend on the credibility of the structural changes to be initiated by the government in order to ensure mid-term sustainability of the under-3% government deficit, GKI said, publishing its latest analysis a day before the scheduled announcement of the government's reform package.

GKI expects the manufacturing sector to remain export-driven, but export growth will slow down slightly due to external factors, while domestic sales will slowly begin to rise. The decline of the construction sector will come to a halt, but no substantial growth can be expected this year.

GKI researchers do not expect inflation to fall further significantly in the months to come after it fell to 4% in January from 4.7% in December. High global energy, commodities and food prices create sustained inflationary pressure, as do the postponed price rises of public utilities services and the return requirement of public utilities built with EU support.

GKI's survey shows that more companies are planning to raise prices. Although the government is trying to use administrative measures to prevent this, the crisis taxes and the planned “hamburger tax” will have an inflationary impact. GKI therefore sees annual average inflation at slightly above 4% in 2011.

The 6% rise in the minimum wage to HUF 78,000 will hardly increase net wages, meaning that real wages will drop about 3% in this wage category. GKI sees real wages rising 2.5% in 2011, varying widely. Real incomes are expected to rise at a similar rate, as the stagnation of the inflation-adjusted value of pensions and the cuts in other social allowances will be almost offset by the payment of the real yields of private pension funds, GKI said.

Since income positions will primarily improve among higher-income groups, who will mainly increase their savings, GKI said, household consumption will grow less than real wages, only around 2%. This will boost imports rather than domestic production as it will largely appear as demand for cars and consumer durables among higher-income groups.

Due to increased domestic demand, the trend of faster export growth compared to imports will reverse, and import growth will slightly exceed export growth. The foreign trade surplus will hardly decline, however, and companies' deteriorating profitability, partly related to the crisis taxes, will limit profit repatriation. This will also limit the reinvestment of profits and domestic investment and developments in general. Due to the rise in EU transfers, the current account surplus and the capital balance surplus will also rise slightly, GKI said in its forecast.

The forint rate, risk- and CDS-premiums now depend on whether a credible, long-term feasibility of the economic policy programme, using rational tools is finally created, GKI said.

If moves considered credible by international institutions and investors are taken, the forint rate could stay at its current strong level for the long term and an interest rate-cutting cycle could begin. In the event of disappointment – particularly if it is reflected in responses by EU institutions and moves by rating agencies – things could start moving quickly in the opposite direction. And the announcement of a programme that is “not concrete enough” could lead to sustained uncertainty, GKI said.