Country Report Hungary

Summary

The governing coalition of the Hungarian Socialist Party (MSZP) and the SZDSZ-Hungarian Liberal Party (SZDSZ) broke up in April 2008, with the SZDSZ leaving in the wake of an overwhelming referendum defeat.
We expect the MSZP to remain in office as a minority government throughout the forecast period, with external support from the SZDSZ.
The MSZP prime minister, Ferenc Gyurcsany, could face an internal leadership challenge within the next couple of years.
We expect the budget deficit to meet the targeted 4% of GDP in 2008, but to be above target in 2009. Structural expenditure reforms will be limited, owing to broad public and political resistance to any such measures.
Real GDP growth will be a sluggish 2% in 2008 but recover more strongly in 2009, as the effects of austerity measures wane.
Average annual inflation will decline to 6.3% in 2008 and to 4.3% in 2009, as changes in regulated prices and subsidies fall out of the year-on-year calculations.
The current-account deficit is forecast to increase steadily as a percentage of GDP in 2008-09, reflecting a gradual recovery in domestic demand.

The government is fragile, but with parliament going into recess on June 15th, there are no immediate threats to the MSZP's position.
The government has gained parliamentary approval for legislation that revokes Hungary's controversial healthcare bill.
The popularity of Fidesz, the main opposition party, may be hit by a leaked speech in May by the party president, Viktor Orban, in which he allegedly raised the possibility of freezing pensions and halting major state investments.
The National Bank of Hungary (NBH, the central bank) raised its base rate in May by 25 basis points, to 8.5%, in response to concerns about persistently high inflation.
In its latest inflation report the NBH has raised its inflation forecasts for both 2008 and 2009, to 6.3% and 4.2%, respectively.
Real GDP growth was 1.6% in January-March 2008, held up by exports. All components of domestic demand contracted, which raises questions about the economy's ability to recover from internal and external shocks.
Consumer price inflation rose by 0.3% month on month in April, and by 6.6% year on year.