In the projection in the Quarterly Report on Inflation issued by the Bank today, Hungarian output will fall this year, with growth expected to be subdued next year. The effect of the price-increasing government measures will be offset by declining domestic demand and persistent slack in the labour market. As a result, inflation may decline gradually as the effect of the VAT and excise tax increases wanes.
According to the Report, developments in inflation are determined by the low inflationary pressure from the real economy and the price-increasing effect of the indirect tax increases. This year, although underlying price developments are subdued, inflation will be kept above the target by the VAT and excise tax increases introduced at the beginning of the year. Next year the measures included in the Structural Reform Programme will raise the price index. Over the forecast horizon this will be offset by the disinflationary impact of declining domestic demand and persistent slack in the labour market. As a result, inflation may decline to close to target as the effect of the VAT and excise tax increases wanes.
Based on the analysis conducted by the Bank, domestic growth prospects have deteriorated compared to March. The reduction in substantial debts built up in the pre-crisis years will lead to a sustained fall in demand of both the private sector and general government. At the same time, the projection suggests that the export sector will also be less able to contribute to growth. The protracted sovereign debt crisis of the euro area and the related fiscal austerity measures have an unfavourable impact on expected developments in the European economic activity. Domestic demand is restrained not only by high unemployment, falling real incomes and tight credit conditions, but also by the Government’s deficit-reducing measures. The projection points out that the decline in the performance of the Hungarian economy partly reflects persistent weaknesses. The weakness of demand in the past several years, the unpredictable economic environment and the reduced availability of credit may entail a gradual decline in capacities. All this has an adverse impact on the long-term growth potential of the economy as well.
Consistent with the weak performance of the real economy, labour market conditions are projected to remain loose and wage growth to be muted. In the projection, the Government’s measures to stimulate labour supply are coupled with subdued labour demand in an environment of weak business activity; consequently, the unemployment rate may continue to increase somewhat. As a result, wage growth may be very subdued in the coming quarters as the effect of the minimum wage increase fades.
The Bank’s experts expect a significant contractionary effect on demand from the government budget. Albeit to a lesser extent, the revenue-increasing measures of the Structural Reform Programme indicate further fiscal tightening in 2013. According to the projection, the government deficit may remain below the 3 per cent threshold level both this year and next year.
The Report is available at:
Magyar Nemzeti Bank