|
|
|
|
|
|
|
| |
  
|
December 15. 2009. Forecast for 2009-2010
In the major part of the world economy recession was over in the third quarter of 2009 in technical terms. In Hungary recession is expected to come to an end only in the fourth quarter. Recovery could be quicker than expected, although setbacks cannot be excluded either, and the former level of GDP could be reached globally only in 2011-2012. In 2010 modest growth is expected in the EU and stagnation in Hungary. Confidence in the Hungarian economy that had been destroyed formerly has been on the rise. Economic trends are basically in line with the projections of GKI prepared in September 2009.
Since last spring business sentiment indices and stock prices have been increasing world-wide almost continuously, the risk appetite of investors has been improving. Following a contraction that lasted four-five quarters, GDP grew by 2.8 per cent in the US and by 0.3 per cent in the EU quarter-on-quarter. However, the sustainability of this recovery is rather uncertain. It is yet to be seen whether or not demand growth supported by the rise of inventories and by expansionary fiscal policies in many countries goes out of steam and to what extent organic growth could be kick-started. The central banks and the governments of advanced economies intervened in the economy in an unprecedented way and extent, and anti-cyclical economic policy was extended by the partial takeover of the risks of the private sector that is obviously unsustainable in the long run.
In 2009 the contraction of GDP is expected to total 2.5 per cent in the US, 4 per cent in the EU and 6.5 per cent in Hungary. In 2009 Hungary shall not have to rely on net external financing sources since it will use the loans received earlier for the increase of international reserves or the repayment of former borrowings. Hungarian economic policy fended off successfully the major threats of the global turmoil: the exchange rate and the liquidity crisis. It undertook a significant correction in order to restore external and internal equilibria mainly by sharp cuts in general government expenditures, to a lesser extent by introducing systemic changes and restructurings in pensions, social services and the tax system. Undertakings and households reduced their demand for credits, their consumption and investments.
With the demise of the technical recession neither the financial crisis nor the real economic one has come to an end. Nevertheless, the risk of collapse ceased to loom. Considering the advanced market economies, US GDP is likely to grow most rapidly in 2010. The average rate of GDP growth in the Economic and Monetary Union is projected to total only 0.7 per cent, but that of Germany and France will most probably match the concomitant figure of the US. In Central and Eastern Europe some GDP growth is anticipated in Poland, Slovenia and Slovakia. Economic growth will be weaker than projected earlier in Japan, but stronger in China. Global recovery will be restrained by unemployment that is higher than expected and it is still increasing. This has an impact on the purchasing power and the quality of the portfolio of banks. A correction is possible in the equity markets of the US and other countries. The rate of inflation and inflationary expectations are lower than assumed earlier. No significant rise of crude oil and commodity prices is forecast. The yields of short term government securities of developed market economies price in low inflation or even deflation for the time being. Therefore low inflation is probable in the first half of 2010 as a consequence of which the lifting of the reference rate of central banks in the leading economies is rather uncertain. On the other hand globally swollen general government deficits and government debts as a result of crisis management will need to be reduced. The combined general government deficit of the EU relative to GDP is projected to reach 2.3 per cent in 2008, 6.9 per cent in 2009 and 7.5 per cent in 2010. The government debt to GDP ratio is likely to grow from 61 per cent to 73 per cent and 79 per cent in the same years. In the developed market economies the reduction of government intervention is unavoidable in the long run. It is assumed that from mid-2010 on the completion of fiscal and monetary easing or even the beginning of tightening will be set on the agenda (not necessarily simultaneously). In addition launching structural reforms in general government and managing social tensions, too, will be necessary.
Following a steady fall during six months, the business confidence index of GKI has been on a continuous and pronounced rise since April 2009 when it hit bottom, although the value of the indicator is still well below the pre-crisis level. The improvement is slower than the deterioration was, and for the time being, pessimism is decreasing, whereas optimism has not started to unfold yet. In November this trend came to a halt in the business sphere and among consumers, in other worlds, stagnation prevailed.
In 2010 the Hungarian economy will be close to stagnation, recovery with modest GDP growth is expected only in the second half of the year. The rate of inflation is set to decelerate; unemployment is likely to peak in 2010. Current external and internal equilibrium indicators may be excellent by European standards; they can be kept under the EU average even if debt consolidation will be implemented in the corporate sector. In 2010 the present and the next government will have to pursue a tight fiscal and income policy that may give a chance for monetary easing. Differences may be possible in the size, but not in the substance and the bias of macroeconomic policy: the economy has to be put on a path that leads to a decreasing external debt ratio and sooner or later a falling government debt ratio.
The 0.7 per cent GDP growth of the EU that is projected in 2010 may slightly bolster Hungary's exports. (According to the forecast of Ifo Institute, Germany's imports may grow by 5.5 per cent.) With the gradual depletion of corporate reserves, the sharp competition for recapturing market shares and the tighter conditions of access to credits, demand of domestic companies will be rather differentiated. The financial intermediary system is set to consolidate slowly but there will be no return to the period of the glut of cheap money. In the banking system short term sources are abundant but long term ones are on short supply. Nevertheless, the provision of loans is being resumed both in forints and euro; banks are looking for reliable debtors. The relocation of a part of the production of the EU can gradually be resumed as well together with the development of regional cooperation and the opening to markets outside the EU. The evaluation of Hungary's capacity of attracting foreign capital is controversial. The assessment of the improvement in financial stability and the reorganisation and rationalisation of the tax system is favourable, but the sharp foreign critics over the transparency of government decisions are alarming. Investment demand will create market mainly for construction. The decrease of consumption amid sharp import competition sets limits to the expansion of supply.
The budgetary law of 2010 reckons with a 3.8 per cent general government deficit relative to GDP (and with a less than 3 per cent deficit including the effect of the business cycle). The reserve valued at about HUF200 billion is meant to cover the risks related to tax revenues, more precisely general government revenues deriving from corporate income taxes and from the newly introduced property tax. If there is significant additional demand on the expenditure side, specific measures have to be taken to neutralise its impact on the deficit. In this approach if the government is ready to insist on the 3.8 per cent deficit to GDP ratio, the 2010 budget is correct, although rather tight, it has risks, but it can be achieved realistically. The new government may introduce changes in the budgetary policy, and even the modification of the deficit target is possible.
Early November politicians of Fidesz indicated the risk of the emergence of a general government deficit reaching 7.5 per cent of GDP in 2010. In their calculations they presented the overwhelming part of items that should be added to expenditures as consolidation ones. These items include the takeover of certain burdens as well and the drawing of a part of government guarantees exceeding the plans of the MAV railway group, BKV Budapest Public Transport Co., local governments, hospitals, public institutions and MFB Hungarian Development Bank. Nevertheless, only such new deficit targets can be considered realistic, which are supported by the EU and the IMF not only because of the effective credit agreements and consolidation rules but because of the reactions of money markets due to unilateral measures.
In principle the correction of the 2010 deficit target can be raised in three approaches:
- The starting point of the first approach is that the actual expenditure level of the general government is permanently higher than assumed earlier. This higher level should be accepted not only for 2010 but for the subsequent years as well. Nevertheless, this is not a simple one-off consolidation but the softening up of the deficit targets of several years. This is an approach of confrontation.
- In the second approach if problems arise during the year the 3.8 per cent deficit target can be achieved in 2010 by taking additional measures aiming at the increase of revenues and the cut of expenditures. If the deficit is higher than planned the increment will be attributed to real consolidation needs (with corporate restructuring). The additional expenditure would not mean significant additional purchasing power for 2010. For the subsequent years fiscal policy could set the target of maintaining the 4 per cent deficit to GDP ratio in order to create the necessary preconditions for tax reductions.
- According to the third approach the new government sets to implement the comprehensive reform of general government expenditures accompanied by a significant reduction of the tax burden levied of labour. It intends to accomplish the consolidation (as described in the second approach) and it could achieve the less than 3 per cent deficit to GDP ratio (the general government deficit criterion of the Treaty of Maastricht) in 2011. With the drop of government debt relative to GDP from 2011 on, Hungary may join the Economic and Monetary Union in 2014 (if the government debt criterion is interpreted more flexibly even in 2013). Taking into account these considerations Hungary has to join the ERM-2 in 2010 and the government should declare the date of accession to the Economic and Monetary Union.
The first approach is not feasible. If the international organisations accept any change in the budget it could only be a one-off one strongly related to restructuring or reforms. Money markets will punish drastically any change in the budget made against the consent of international organisations leading to the freeze of the government securities market, the depreciation of the exchange rate and subsequently spectacular interest rate rises. The second approach could be accomplished; the third one can certainly be implemented. In these cases the deficit target relative to GDP could be about 5 per cent in 2010 and 4 per cent without one-off consolidation expenditures. From a professional point of view the third approach would be the most favourable. Together with improving investors' evaluation it could contribute to the reduction of the interest burden of the general government as well. This may extend the room of manoeuvring for the reduction of tax burdens later or for the covering of the expenditure needs of the transformation of general government systems. These factors could improve competitiveness and generate the inflow of foreign capital
Gross government debt according ESA methodology relative to GDP increases from 73 per cent in the end of 2008 to 80 per cent by the end of 2009 and it will be the same at the end of 2010. If consolidation takes place, it will be higher than that. This will not be high in Europe at all. Debt financing will be possible based on the sources of Hungary's financial system as well as by issuing international bonds but in case of need the rest of the IMF credit line, too, can be drawn until the autumn of 2010. The external balance will be rather favourable in 2010, similarly to 2009. The external financing need will be zero; Hungary's external debt will decrease markedly in 2010.
The Hungarian economy follows European trends with a three-month lag; therefore here stagnation is likely in 2010. Modest GDP growth of 1.5 per cent is likely from the second half of the year compared with he same period of the previous year. In 2009 and 2010 GDP is forecast to decline by 6-7 per cent. The performance of agriculture and the majority of services is anticipated to stagnate. With investments financed form EU funds construction will be the most dynamic segment of the Hungarian economy with a 6 per cent increase in gross production. With slowly improving export possibilities and stagnating domestic demand, industry is projected to grow by 3-4 per cent. Undertakings in general, small ones in particular suffer from the lack of domestic demand and the shortage of financing sources. The number of bankruptcies and unwinding of firms is set to increase, although it will be rather low compared to the 1.6 million businesses. The number of newly emerging businesses will exceed that of unwounded ones. Unpaid tax obligations will grow spectacularly. The micro, small and medium-sized enterprises tend to turn to the grey economy.
Total domestic demand is forecast to grow by about 1 per cent. The 5 per cent growth of investments is not enough to reach the level of 2008. Following the strong decline in 2009, business investments are likely to be up slightly, mainly only from the second half of the year on. The consumption of households is expected to decrease somewhat. Due to the oversupply of labour force and the lowering of personal income tax rates gross earnings are projected to mount by only 1 per cent. Although the minimum wage will be lifted by nearly 3 per cent, many undertakings do not have the financial sources to raise wages. Due to changes in taxation net earnings are likely to jump by 7.5 per cent resulting in a 3.5-4 per cent growth of real earnings. Real incomes are projected to stagnate since consumption still falls, the support of unemployed goes back over time, the benefits of the cafeteria system are declining because they are taxed a family allowances will not increase in nominal terms either. Because of the increase based on the correction by an overestimated inflation rate (4.1 per cent) the real value of monthly pensions will slightly be up but that of annual ones will drop somewhat mainly because of the elimination of the 13th month pensions. The access to loans by households will be somewhat easier, but its behaviour will be more cautious. The gross savings rate will increase to about 6 per cent; the net one to close to 5 per cent, the later will cover the general government deficit in 2010.
In 2009, employment declines much less than GDP. In 2010 another 1-2 per cent fall in employment is probable. The rate of unemployment will average 11 per cent in 2010 and it will drop to 10.5 per cent by the end of the year. In 2010 the rate of inflation is expected to total 3.5 per cent, at year-wend 3 per cent moth-on-month. The external financing need will be restricted to the renewal of the debt stock; the general government deficit will not increase, if it will only by the one-off consolidation expenditures. Nevertheless, Hungary's external indebtedness is still high, the government debt is close to the EU average, but it is above the regional level. If the Hungarian economy remains on this macroeconomic path, the international assessment and the financial market situation may improve further. In the opposite case the monetary policy may face challenges in 2010. Such a challenge could be if the government itself does not care for reducing disequilibria. The difficulties of regional competitors, too, have an adverse impact on the Hungarian economy. In addition, uncertainties of the global economy, too, imply risks. In the probable case assumed by GKI (second or third approach) with gradually improving investors' confidence demand for Hungarian financial assets will grow. In the firs half of 2010 political (election) risks will be priced in. The reduction of the reference rate of the National Bank of Hungary and the strengthening of the exchange rate of the forint to the euro come to an end, the volatility of the exchange rate increases, biased towards the week direction. If an economic policy coordinated with international financial organisations is pursued, in the second half of the year the yields of government securities are expected to diminish further, the forint is assumed to strengthen. The central bank may cut its reference rate gradually (while preserving stability) from 6 per cent at the end of 2009 to about 5 per cent y the end of 2010. (At this time a global interest rate rising cycle is set to start.) In the first half of 2010 the exchange rate of the forint to the euro will stay at around HUF270 - that was typical in the second half of 2009 - due to uncertainties concerning the elections. Assuming an economic policy to be welcomed by money markets and international institutions in the second half of 2010 it may strengthen to HUF260.
The favourable equilibrium path makes it possible to start preparations for Hungary's accession to the Economic and Monetary Union. In February 2010 it would be advisable to arrange a parliamentary discussion about Hungary's intentions and as a result of this to apply for joining ERM-2 that is the vestibule of the euro. This would unanimously reflect Hungary's intentions and would serve as an anchor for the economic policy.
GKI forecast for 2010
| 2007 | 2008 | 2009 | Forecast of 2010 |
|---|
| (actual) | (estimate) | September | December |
|---|
| GDP production | 101.0 | 100.6 | 93.5 | 100 | 100 |
| Agriculture (1) | 78.7 | 150.6 | 83 | 100 | 100 |
| Industry (2) | 106.0 | 99.9 | 85 | 102 | 102 |
| Construction (3) | 93.3 | 94.8 | 98 | 104 | 104 |
| Trade (4) | 104.0 | 97.4 | 91 | 100 | 100 |
| Transport and telecommunications (5) | 105.1 | 100.3 | 95 | 100 | 100 |
| Financial services (6) | 101.1 | 97.7 | 100 | 97 | 100 |
| Public administration, education, health care (7) | 96.1 | 100.5 | 100 | 100 | 100 |
| Other services (8) | 103.4 | 96.0 | 100 | 100 | 100 |
| Core growth (2)+ (3)+ (4)+ (5)+ (6) | 103.2 | 98.5 | 92.5 | 100 | 100-101 |
| GDP domestic demand | 99.0 | 99.9 | 89 | 101 | 101 |
| Individual consumption | 98.4 | 99.9 | 93.3 | 100 | 99 |
| Gross fixed capital formation (investments) | 101.6 | 97.4 | 94 | 106 | 105 |
| External trade of goods |
| Exports | 116.2 | 104.6 | 85 | 104 | 104 |
| Imports | 113.3 | 104.0 | 79 | 105 | 105.5 |
| Consumer price index (preceding year = 100) | 108.0 | 106.1 | 104.1 | 104 | 103.5 |
| Combined balance of the current account and capital account |
| EUR billion | -5.4 | -6.6 | 0.5 | -0.5 | 0 |
| as a percentage of GDP | -5.3 | -6.2 | 0.5 | -0.5 | 0 |
| Unemployment rate (annual average) | 7.4 | 8.0 | 10.5 | 9.8 | 11 |
| General government deficit. in per cent of GDP (ESA) | 4.9 | 3.8 | 3.9 | 3.8 | 3.8 (5*) |
*In case of the settlement of one-off consolidation expenditures
Source: Hungarian Central Statistical Office, GKI
Archive |
|
|
>