Hungary 2007 GDP growth to be slower than expected

From Portfolio Hungary:

Hungary 2007 GDP growth to be slower than expected - GKI
Monday, September 3, 2007 12:56:00 PM

Hungary's economy will grow at a smaller rate in 2007 than previously thought, while the rise of gross wages and inflation will be faster than expected. The latter two will increase budget revenues, thus - also taking into consideration slower GDP growth - will reduce the deficit, economic think tank GKI said in a forecast elaborated in co-operation with Erste Bank and published on Monday.

Hungary's inflation already reached its peak (in March) and is expected to drop considerably from September onward. Agricultural producer prices, however - due partly to bad crop caused by unfavourable weather and growing world market demand triggered by swiftly rising consumption in Asia - are hindering this process. Therefore, Hungary's consumer prices are expected to rise 7.5% on average in 2007 and 5.5% at year-end yr/yr, the GKI projected. Its respective forecasts a month ago were 7.0% and 4.8%.

Nominal gross wages shot up in June, as consequence of 13th months wages paid out in the public sector already in June, which led to an over 8% rise in gross wages. Wage increase exceeded 10% in the public sector, partly as the result of the whitening of the economy. The researcher expects a real wage decline of over 4% for this year.

Hungary's jobless rate has so far been smaller than last year, but due partly to seasonal effects and a mass layoff among teachers, some rise in the rate of unemployment is expected at the end of the year, the think tank forecasted.

The GKI expects the central bank to cut the base rate to around 7.00% by the end of 2007 from the current 7.75%. It also projects the public sector deficit to come in at around 6.0% of GDP this year, smaller than the gap targeted by the government in the Convergence Programme.

The GKI has reduced its GDP growth forecast for this year to 2.5% from 3.2% a month ago. It now expects investments to grow by 2.0%, against 4.0% projected in the previous estimate. It has also cut back its estimates for construction and retail trade increase to no growth from 3% and 0.5%, respectively.