GKI: The recession is over soon?

According to the forecast of GKI Economic Research Co., the Hungarian economy is recovering slowly from the recession. In the world economy the Irish crisis that followed the Greek one is intensifying uncertainties and sensitivity to developments that seem to be unsustainable. Hungarian economic policy is not considering these factors. In addition, although the government is committed to meeting formally the deficit targets in 2010 and 2011 economic policy triggered rather risky trends.

This economic policy it does not promote economic growth and job creation significantly even in the short-term. It produces sharp swings in the exchange rate of the forint to the euro and other currencies that raises the burden of debtors including households, the business sector as well as the government. The weakening of the rule of law, the use-up of savings and the general inward looking nature of economic policy constitute the anachronistic Hungarian model that is diverging from European trends. Sooner or later unavoidable painful corrections are be needed that will be much more severe than otherwise would be necessary. The tax reductions of 2010-2011cannot be funded after 2010 (e.g. the assets of the private pension funds run out), therefore Hungary's evaluation will turn worse with the consequence of Hungary's worsening evaluation, weakening forint and rising interest rates.

The rate of inflation seems to stick at 4 per cent. The government would obviously prefer the inflation target to amount to 3.5 per cent which is higher than the present one. Following the nomination of the new members of the Monetary Council in spring 2011 the formal lift of the inflation target may take place. The rate of inflation is expected to decrease from 4.8 per cent in 2010 to about 3.8 per cent in 2011. The exchange rate of the forint to the euro may average HUF276 in 2011 amid great fluctuations similar to the average of 2010. Nevertheless, both the exchange rate and its volatility may depend on the credibility of economic policy and the sustainability of the trends to a large extent. Independently from the orientation and preferences of its members, the Monetary Council is likely to raise the reference rate of the National Bank of Hungary sharply if the exchange rate of the forint to the euro weakens to more than HUF290, since the stabilisation of the exchange rate at this level would cause grief payment problems among those indebted in foreign exchange with serious repercussions on the banking system. The reference rate of the National Bank of Hungary may increase to about 6 per cent in 2011. At the same time euro and dollar interest rates, too, may set to grow. In the case of serious money market mistrust, the reference rate of the National Bank of Hungary may be higher. If the reform program of the government meets the expectations, the present level of 5.75 per cent may persist. As far as the current account is concerned, following the EUR0.5 billion surplus in 2010 with the slow pick-up of domestic demand, a deficit of EUR1 billion is projected. With the increase of the inflow of EU funds the surplus of external financing is forecast to remain practically unchanged at EUR3 billion.

Favourable external demand supports the dynamic growth of exports, but no acceleration is anticipated. The major part of the tax measures taken by the government (special levies imposed particularly on the banking system, the erosion of the rule of law, the increase of the costs of employment) affects the possibilities of economic growth. This is compensated only partly by the decrease of wage costs of qualified labour and by the reduction of the corporate income tax rate. The relatively weak exchange rate of the forint to the euro affects economic growth mainly by the deterioration of the competitiveness of imports. (At the same time consumer demand and the financing capability of the banks are hit by the increased debt amortisation burdens of households and by the deteriorating loan portfolio, respectively.)

Industry and construction will be the two driving forces of economic growth. Assuming average whether conditions, agricultural production is projected to grow rapidly. Retail trade turnover will be up by about 2 per cent, car sales more than that. Loans provided by banks hardly rise or they will increase only slightly constraining the growth potential of the whole economy in general and that of small and medium sized enterprises in particular. With the levies imposed on banks the profitability of the domestic banking sector will disappear for a rather long period of time, the consequence of which could be the reallocation of financial sources provided by mother banks or financial markets to other countries. In 2011 the number of employees is likely to grow slightly; it will correspond to the rate of decrease recorded in 2010. The rate of unemployment will go down from 11.5 per cent in 2010 to 11 per cent in 2011.