National Bank foresees recession and higher inflation

Without austerity measures, Hungary will overshoot budget deficit goal in 2013 and the annual inflation rate is likely to climb to 5% from 3.4%. That is the projection by the National Bank of Hungary in its quarterly Report on Inflation.

The fiscal loosening steps announced by the government since June would hit a hole of about HUF 440 billion on the 2013 budget balance. Should the government fail to offset the budgetary effects of the measures, next year’s deficit may be around 3.5-4.0% of GDP, the central bank (NBH) projects in its fresh quarterly report published after the announcement of the rate decision (-25 bps to 6.50%) early this week.

As such an overshoot of the target would put cohesion funds into jeopardy, the NBH staff's forecast is based on the technical assumption that in the future, the government will neutralize the deficit increasing effect of the measures taken in the past period. If this adjustment is indeed carried out, the budget gap could be taken down to 2.7% of GDP and if all free fiscal reserves are cancelled the shortfall could be reduced to 2.4%.

The report says that only by the cancellation of the free fiscal reserves can this year’s budget deficit be kept below 3.0% of GDP. NBH staff said further balance improving measures may become necessary for the fiscal adjustment to be sustainable over the medium term.

Next year’s inflation will be raised by about one percentage point by food and oil price chocks and consumer prices are also driven higher by government measures (e.g. tax hike in 2013), the NBH forecasts.

At a 1.4% expected recession and EUR/HUF 285 (around the current exchange rate) would result in 77% debt-to-GDP ratio this year (down from around 81% at the end of 2011) that could be lowered at a 0.7% GDP growth next year to 76%.

(source: portfolio.hu)