Country Report Hungary

Outlook for 2008-09

• 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.

Monthly review

• 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.

SOURCE: Country Report