Economy
Hungary c.bank publishes Inflation Report for November
The bank repeated its earlier comment that Hungary's public sector deficit this year would reach 5.6% of gross domestic product, compared with the government target for a 5.0%-5.3% gap.
See the main points of the central bank's inflation report below:
Stable forint exchange rate and falling short-term yields - long-term risks remain
The forint exchange rate has been fluctuating along an appreciating path, its reactions to adverse fundamental news being slight and brief, which may be explained by the MNB's cautious approach to interest rate cuts this year, in addition to the positive stimuli from the global financial marketplace. The decline in yields at the short end is evidence of improvements in perceptions of risks related to near-term economic developments over the past quarter. All this, however, has not been associated with a perceptible improvement in Hungary's equilibrium indicators - market participants have remained undecided over the convergence path.
Disinflation has started...
The consumer price index fell to 7 per cent, core inflation dipping below 6 per cent according to third-quarter data. The decline was quite widespread, indicating a robust disinflation. The decline in inflation, following the sharp rise due to the hike in indirect taxes (VAT and excise duties), could be explained by the appreciation of the forint vis-à-vis the euro, a moderation in consumption, and a drop in inflation expectations, all of which helped to counterbalance the still high growth of unit labour costs.
Moderating demand-pull, inflationary pressure
The rate of household consumption growth has slowed somewhat this year, after rising strongly in 2002-2003 and, as a consequence, its inflationary impact has been more moderating. Although second-quarter actual data reflect a pick-up in consumption growth, it may be ascribed primarily to transient factors.
Wage inflation
Labour market tightness, although still present, may have eased somewhat: the rates of wage inflation and labour demand growth both slowed. Wage growth may have remained high, but after allowance for developments in productivity, labour costs growth seem to have started to abate.
Inflation expectations cooled
According to the latest polls, inflation expectations continued to moderate in the period under review. Inflation perceptions of households and corporate managers fell. The survey of inflation prospects, conducted in October, showed that market analysts revised down their short-run inflation expectations, leaving, however, their forecast for end-2005 unchanged.
GDP growth stabilises between 3.5%-4%
After this year's brisk investment activity and a resulting growth of around 4%, the rate of economic growth is expected to stabilise in the coming two years. GDP growth is likely to be between 3.5%-4% in 2005 and 2006.
Slowdown in domestic use
Looking at the components of growth, consumption is likely to rise more slowly in the forecast period than in previous years. The rate of consumption growth is expected to remain below real income growth, implying a decline in households' propensity to consume. Our forecast of investments reflects a slowdown in household and public sector fixed investment activity besides a stabilising corporate sector investment growth.
Improvement in the goods balance
Net exports are expected to contribute positively to economic growth in the coming two years, driven by moderating import demand in response to the slowdown in domestic absorption and by a gradual increase in Hungary's export market share.
Gradual disinflation
On the central inflation projection, disinflation is assumed to continue. We expect the consumer price index to be slightly below 6 per cent at end-2004, 4-5 per cent at end-2005 and around 4 per cent at end-2006. The central projection has remained broadly unrevised relative to that presented in the August Report.
Modest decline in core inflation
Next year, the effects of macroeconomic factors contributing to disinflation, the slower increase in wage costs, the strong exchange rate and low consumption growth, are expected to be weakened in part by certain inflationary shocks, such as rising energy prices. Disinflation may be more solidly based in 2006, when the fall in unit labour costs growth, the assumption of a relatively strong forint exchange rate and the anticipated lower path of oil prices will all have their effects.
See the main points of the central bank's inflation report below:
Stable forint exchange rate and falling short-term yields - long-term risks remain
The forint exchange rate has been fluctuating along an appreciating path, its reactions to adverse fundamental news being slight and brief, which may be explained by the MNB's cautious approach to interest rate cuts this year, in addition to the positive stimuli from the global financial marketplace. The decline in yields at the short end is evidence of improvements in perceptions of risks related to near-term economic developments over the past quarter. All this, however, has not been associated with a perceptible improvement in Hungary's equilibrium indicators - market participants have remained undecided over the convergence path.
Disinflation has started...
The consumer price index fell to 7 per cent, core inflation dipping below 6 per cent according to third-quarter data. The decline was quite widespread, indicating a robust disinflation. The decline in inflation, following the sharp rise due to the hike in indirect taxes (VAT and excise duties), could be explained by the appreciation of the forint vis-à-vis the euro, a moderation in consumption, and a drop in inflation expectations, all of which helped to counterbalance the still high growth of unit labour costs.
Moderating demand-pull, inflationary pressure
The rate of household consumption growth has slowed somewhat this year, after rising strongly in 2002-2003 and, as a consequence, its inflationary impact has been more moderating. Although second-quarter actual data reflect a pick-up in consumption growth, it may be ascribed primarily to transient factors.
Wage inflation
Labour market tightness, although still present, may have eased somewhat: the rates of wage inflation and labour demand growth both slowed. Wage growth may have remained high, but after allowance for developments in productivity, labour costs growth seem to have started to abate.
Inflation expectations cooled
According to the latest polls, inflation expectations continued to moderate in the period under review. Inflation perceptions of households and corporate managers fell. The survey of inflation prospects, conducted in October, showed that market analysts revised down their short-run inflation expectations, leaving, however, their forecast for end-2005 unchanged.
GDP growth stabilises between 3.5%-4%
After this year's brisk investment activity and a resulting growth of around 4%, the rate of economic growth is expected to stabilise in the coming two years. GDP growth is likely to be between 3.5%-4% in 2005 and 2006.
Slowdown in domestic use
Looking at the components of growth, consumption is likely to rise more slowly in the forecast period than in previous years. The rate of consumption growth is expected to remain below real income growth, implying a decline in households' propensity to consume. Our forecast of investments reflects a slowdown in household and public sector fixed investment activity besides a stabilising corporate sector investment growth.
Improvement in the goods balance
Net exports are expected to contribute positively to economic growth in the coming two years, driven by moderating import demand in response to the slowdown in domestic absorption and by a gradual increase in Hungary's export market share.
Gradual disinflation
On the central inflation projection, disinflation is assumed to continue. We expect the consumer price index to be slightly below 6 per cent at end-2004, 4-5 per cent at end-2005 and around 4 per cent at end-2006. The central projection has remained broadly unrevised relative to that presented in the August Report.
Modest decline in core inflation
Next year, the effects of macroeconomic factors contributing to disinflation, the slower increase in wage costs, the strong exchange rate and low consumption growth, are expected to be weakened in part by certain inflationary shocks, such as rising energy prices. Disinflation may be more solidly based in 2006, when the fall in unit labour costs growth, the assumption of a relatively strong forint exchange rate and the anticipated lower path of oil prices will all have their effects.
