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
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.