June 29th, 2012

NBH: Declining domestic demand to counter effect of gov’t measures on prices

Declining domestic demand and persistent slack on the labour market will offset in the mid-term government measures that raise prices, the National Bank of Hungary (NBH) said in its quarterly Inflation Report published on Thursday.

Central bank governor Andras Simor told journalist on Tuesday that the NBH pushed back its projection for meeting the 3pc mid-term consumer price inflation target to the end of 2013 in the fresh report from the first half of 2013 in the previous report published in March.

The NBH cut its projection for average annual inflation in 2012 to 5.3pc in the fresh report from 5.6pc in March. It raised the projection for annual average inflation in 2013 to 3.5pc from 3.0pc.

The central bank said VAT and excise tax increases introduced at the start of 2012 will keep CPI over the target this year, and government measures outlined in the updated Szell Kalman Plan, a restructuring programme, will raise prices in 2013. But this will be offset by declining domestic demand and slack on the labour market, perhaps bringing inflation close to the target as the effect of the VAT and excise tax increases wane, it added.

The NBH changed its GDP projection for this year to a 0.8pc decline from modest growth of 0.1pc. It lowered the forecast for GDP growth in 2013 to 0.8pc from 1.6pc.

A reduction in debts accrued in the years before the crisis will lead to a sustained fall in demand in both the private and the public sector, the NBH said. The projection suggest exports will be less able to contribute to growth, while domestic demand remains restrained by high unemployment, falling real incomes, tight credit conditions and government measures to reduce the deficit, it added.

The NBH warned that the weak demand of the past several years, the unpredictable economic environment and reduced availability of credit could result in a gradual decline in capacities, adversely affecting the growth potential of the economy in the long term.

Wage growth may be “very subdued” in the coming quarters as labour market conditions remain loose and the effect of a minimum wage increase fades, the NBH said. It noted that the unemployment rate could continue to edge up as government measures to stimulate labour supply are paired with subdued labour demand in an environment of weak business activity.

The report projects Hungary’s general government deficit will be under the 3pc of GDP threshold both in 2012 and 2013. It added that the 2.7pc projection for 2012 was conditional on freezing reserves equivalent to 0.9pc of GDP. Without the measure, the deficit is expected to reach 3.6pc.

The NBH staff calculated with the current HUF/EUR rate of 290 for the short term when preparing the report, assuming a fall in Hungary’s risk premium could cause the forint to firm.

“A successful agreement win the International Monetary Fund in the autumn would substantially improve the risk assessment,” said NBH chief analyst Barnabas Virag.

Hungary is seeking precautionary financial assistance from the IMF and the European Union.

The government projects GDP growth will slow from 1.7pc in 2011 to 0.1pc in 2012 before picking up to 1.6pc in 2013. It forecasts average annual inflation will rise from 3.9pc in 2011 to 5.2pc in 2012 before slowing to 4.2pc in 2013.

  • wolfi

    “domestic demand remains restrained by high unemployment, falling real incomes, tight credit conditions and government measures to reduce the deficit …”

    looks rather gloomy, doesn’t it ?

    Which companies will invest and/or hire new workers in this scenario ?

    Where are the million of new jobs supposed to come from ?

    Fidesz is bent on destroying Hungary or at least the Hungarian economy! On the other hand there are their glorious dreams of “Greater Hungary” and its fascist times and the revision of Trianon – loonies, all of them …

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