Decreasing inflation, weak forint

The forecast prepared by GKI Economic Research Co. in co-operation with Erste Bank shows that both the depth and duration of the global recession are for the time being completely unpredictable.

 The January prognosis of the European Commission forecasts an
almost 2% decline of GDP in the EU during 2009; within which the
contraction will be somewhat stronger in Germany and smaller in
Hungary. The forecast of GKI is more pessimistic: it expects a 2.5%
decrease of GDP in Hungary but – in accordance with the opinion of
the European Commission – anticipates some improvement by the end
of 2009. Much stronger decline is expected in the Baltic States,
Ireland and UK. In Bulgaria, Slovakia and Romania – where the
growth rate in 2008 was more than 6% – 4-6 percentage points
slowdown is expected.
It is almost sure, that the deficit of the
general government in Hungary will be well below the Maastricht
criterion in 2009. Strict monitoring of the IMF agreement makes the
fulfillment of the deficit target very likely. Most probably the
government will counterbalance the shortfall of the revenue caused by
the deeper than expected recession and lower than planned inflation;
moreover it will regroup certain items in the budget (or in the tax
system). The European Commission forecasts 2.8% general government
deficit for Hungary, which is much smaller than the 4.4% average of
the EU and is the tenth smallest deficit in the EU-27. The fast
reduction of the balance of payments deficit became inevitable as
well, because in the present money market situation the access to
foreign sources is both difficult and costly. In fact, the scarcity
of sources compels the reduction of the external deficit. The
improvement will take place due to increase in the trade surplus and
the EU transfers. This year the balance of payments deficit as a
percentage of GDP expected to be around the European average.
Gross
wages are expected to grow by 4% in the business sector and to
decrease by 1% in the public sector, which altogether means a minimal
decrease of real earnings. Nevertheless, the consumption and
investments of households will decrease perceptibly because of the
growing burden of amortization of debt, contraction of credit sources
and rising borrowing costs. At the beginning of 2009 inflation
decreases rapidly – as global energy and agricultural prices drop.
The annual average price increase is expected to be 2.3%, but at the
end of the year it will be somewhat higher: around 2.5% – because
of the lower basis. In the conditions of low demand and strong
competition an eventual increase of the VAT would have limited impact
on the prices.
Between the end of December and end of January the
exchange rate of the forint against the euro weakened from 265 to
300. This was due mainly to international developments, since the
currencies of other nations in the region weakened similarly. In
January the Central Bank continued its cautious cuts in the base
rate; this policy is expected to be continued during the year.