beyondbrics

The European Commission on Thursday said Hungary’s economy is set to contract by 0.1 per cent this year, down from 0.5 per cent growth in its previous prognosis, with the outlook clouded by an expected recession for the European Union as a whole.

While the report acknowledges that Hungary had proved more resilient in the second half of 2011 than anticipated in last autumn’s forecast, the authors warn that a lot of this was due to agriculture rebounding from a poor 2010 in a way that’s “unlikely to be repeated” this year. So don’t expect miracles.

A poor external environment, meaning weak demand from Europe for exports (particularly from Germany),  results in  “appreciable implications for economic growth prospects,” says the Commission. Meanwhile domestic demand – under pressure since 2006 – will be hit by further fiscal austerity.

The government of prime minister Viktor Orbán must plug gaps from the loss of revenues from the large tax cuts implemented last year, whose impact on the headline deficit was obscured by the transfer of private pension fund assets to the state.

His room for manouevre will be secrely limited by the needs to comply with the demands of the European Union and IMF from which Budapest is seeking a standby loan.

In other words, one-off measures just, er, can’t be repeated.

The EC also sees inflation rising to 5.1 per cent in 2012, thanks mostly to increases in indirect taxes, including VAT, which at 27 per cent, is the highest rate in the EU, and higher-than-assumed oil prices.

The recent recovery in European financial markets, including Hungary, where equities are 25 per cent up on the year in dollar terms, suggests that the Commission is excessively gloomy – or just a bit out of date, given the time it takes to compile such reports.

Except that there is no shortage of other bad news for Budapest, with Bloomberg reporting on Thursday that  last year Hungary’s banking industry was unprofitable for the first time in 13 years.

Commercial banks posted a combined loss of Ft92.6bn (€320m) in 2011 after lenders booked losses of  Ft149bn in losses in the fourth quarter, Pszaf, the financial supervisory authority, stated on its website. “Banks face further deterioration in their credit portfolio after the rise in bad loans picked up pace in the final quarter, reaching 8.6 per cent by the end of the year,” Bloomberg wrote, citing Pszaf.

But, the bulls might say, this 2011 report is backward-looking.Then take this survey of the jobs market from GKI, a local economics think-tank.

In a study based on a survey last month of 800 companies and entitled ‘Another wave of layoffs is on the agenda’,  it says employment prospects are “very unfavourable.”

It found a mere 4 per cent of respondent companies planning to expand staff, against 29 per cent expecting staff cuts.

“The greater [larger] a firm is, the higher the probability that it will reduce employees”, with  40 per cent of companies employing more than 500 person indicating lay-offs, and only 3 per cent expecting an increase, the report says.

GKI argues that a majority of companies, believing the recovery which started in late 2009 could be maintained, had tried to maintain their workforce – but by early 2012 this confidence had evaporated.

True, the GKI hierachy, which includes a former Socialist deputy finance minister,  isn’t nmecessarily well-disposed to Mr O, who once promised to create 1m jobs.

It points out how Orbán government action may have made things worse.
“Obviously, the mandatory raise in minimum wages, the further taxation of the cafeteria [meal voucher] system, the increase in social security contributions and the rise of consumption taxes did not improve the mood of corporate leaders,” the report states, adding:

“With the increase of consumption taxes almost all goods and services that are offered to indigenous consumers is becoming more expensive.”

True, it’s February and out of season, but observers report Budapest roads to be markedly free of jams and its restaurants to be chillingly empty since the New Year: now you know why.

Related reading:
IMF to Hungary: get some insurance, it’s a dangerous world, beyondbrics
Guest post: Orbán’s hazy memory of debts, cuts and economic policy, beyondbrics