Hungary: upward revision for 2010 and 2011

We present our updated outlook on the Hungarian economy, taking into account the
latest economic releases for October and November.
• We have revised up our growth forecast for 2010 and 2011. We now expect the
Hungarian economy to grow 1.1% y/y in 2010 (from a previous 0.3% y/y) and to
grow 3.1% y/y in 2011 (from a previous 2.1% y/y). The upward revision reflects the
positive Q3 GDP numbers, where especially private consumption surprised on the
upside. We now expect private consumption to increase 3.3% y/y next year.
• We also continue to expect Hungarian inflation to fall through most of 2011. From the
current level of above 4% y/y we expect Hungarian inflation to move below 3.5% y/y
around mid-2011. This is well within the Hungarian central bank’s inflation target of
3.0% y/y +/- 1 percentage point.
• The external balances have developed quite positively. There is now a large surplus
on the trade balance and the current account balance. However, as domestic demand
is starting to increase we should see a gradual weakening of the external balances. We
expect the current account balance to move back into deficit in 2011.

Economic growth

Gross domestic product


• The Hungarian economy continued to expand in Q3 10 on a
y/y basis. The recovery of the Hungarian economy looks firmer
than we had previously expected.
• We now expect Hungarian GDP to grow 1.1% y/y this year and 3.1%
y/y next year.


Private consumption

• Hungarian private consumption rebounded significantly in Q3 10.
Hence, the outlook for Hungarian private consumption has
improved significantly compared with our previous expectations.
• We expect private consumption to  continue  to  recover.  We  now
forecast it to contract 1.3% y/y in 2010 and to grow 3.3% y/y in
2011.

Investment

• Investment was weak heading into the crisis and has dropped further
due to weak production, exports and tighter credit conditions.
There are no clear signs that the recovery in investments is
speeding up, so we expect it to continue to move up gradually in
the coming quarters. We forecast investments to contract 2.7% y/y
this  year  and  to  grow  2.4%  y/y next year

Exports and imports 

• Exports have improved sharply as the euro area is recovering. We
expect exports to grow 14.0% y/y in 2010 and 14.0% y/y in 2011.
Similarly imports are picking up as domestic demand is
increasing. We expect imports to grow 13.9% y/y this year and
17.0% y/y next year.

External balances 
Trade balance

During  the  past  year  we  have seen significant improvement in
Hungarian trade balance. The primary cause for this has been
weak domestic demand.
However, the recovery of domestic demand is speeding up
so should see a weakening of the trade balance going forward.

Current account 

• The fairly large Hungarian current account deficit has improved
sharply and Hungary now runs a current account surplus. This is
primarily due to the large trade balance surplus. However, as this
begins to weaken we should see the current account balance to
move back into deficit.

Production and labour market 
Industrial production

• Industrial production has improved sharply  – mainly due to a strong base effect.
• Hungarian PMIs are currently well above 50. However, we expect industrial production growth to move to more reasonable rates. Our forecast is now 11.0% y/y this year and 10.3% y/y next year.

Unemployment

• Hungarian unemployment has risen significantly during the
recession. Recently it has started to show sign of stabilisation and
we could see a beginning decline in unemployment during 2011.
We now forecast unemployment in Hungary to reach 11.0% this
year and 10.3% next year.

Wages, prices and retail sales 
Wages

• The drop in economic activity and rising unemployment have caused
wage growth to slow sharply.
• Wage growth is beginning to stabilise at the current low level
and we do not expect it to pick up before well into next year. On
average, wage growth should be 2.3% y/y in 2010 and 2.8% y/y in
2011.

Inflation

• Hungarian inflation should come down a bit faster than previously
forecast. Although we expect inflation in Hungary to remain
around 4% y/y for the rest of 2010 it should move firmly below
this level in the beginning of 2011 and stay within the Hungarian
central bank’s (MNB) inflation target of 3.0% y/y +/- 1pp.

Retail sales

• Hungarian retail sales have been very weak for some time and have
weakened further as real wage growth has turned negative.
• We expect retail sales to remain at the current weak level in the
coming months while wage growth is low. Retail sales growth
should on average be -1.7% y/y in 2010 and -1.4% y/y in 2011.
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