table 1-2
MnB forecast compared to other institutions' forecasts
2011 2012 2013
Consumer price Index (annual average growth rate, %)
mnB (march 2011) 4.0 3.4 −
consensus economics (march 2011)1 3.3 − 3.9 − 5.2 2.7 − 3.4 − 4.5 3.3*
european commission (november 2010) 3.9 3.7 −
imf (february 2010) 4.1 3.5 3.0
oecD (november 2010) 2.9 3.1 −
reuters survey (march 2011)1 3.6 − 4.0 − 4.9 2.8 − 3.5 − 4.9 2.4 − 3.2 − 4.2
GDp (annual growth rate, %)
mnB (march 2011)4 2.9 3.0 −
consensus economics (march 2011)1 2.0 − 2.5 − 3.1 2.7 − 3.2 − 3.5 3.3*
european commission (november 2010) 2.8 3.2 −
imf (february 2010) 2.8 3.0 3.0
oecD (november 2010) 2.5 3.1 −
reuters survey (march 2011)1 1.9 − 2.6 − 3.1 2.5 − 3.3 − 4.2 −
Current account balance (percent of GDp)
mnB (march 2011) 1.4 2.0 −
european commission (november 2010) 0.4 −0.4 −
imf (february 2010) 0.1 −0.6 −1.1
oecD (november 2010) −1.1 −1.3 −
Budget Balance (eSa-95 method, percent of GDp)
mnB (march 2011)6 2.5 (−3.6) − (−4.6) −
consensus economics (march 2011)1 (−2.5)−(−3.3)−(−5.2)** (−2.4)−(−3.0)−(−4.0) −
european commission (november 2010) −4.7 −6.2 −
imf (february 2010) 5.7 −5.2 −7.2
oecD (november 2010) −3.1 −2.9 −
reuters survey (march 2011)1 (−3.0) − 1.6 − 5.8 (−3.7) − (−2.5) − 2.9 −
forecasts on the size of Hungary's export markets (annual growth rate, %)
mnB (march 2011) 5.6 4.8 −
european commission (november 2010)2 6.2 6.7 −
imf (october 2010) 5.1 − −
oecD (november 2010)2,3 6.6 5.2 −
forecasts on the GDp growth rate of Hungary's trade partners (annual growth rate, %)
mnB (march 2011) 2.1 2.3 −
consensus economics (march 2011)1 2.2 2.3 −
european commission (february 2011)2 2.1 − −
imf (January 2011)2 2.2 2.5 −
oecD (november 2010)2,3 2.3 2.4 −
forecasts on the GDp growth rate of euro area (annual growth rate, %)
mnB (march 2011)5 1.6 1.7 −
consensus economics (march 2011)1 1.7 1.7 −
european commission (november 2009) 1.6 − −
imf (January 2010) 1.5 1.7 −
oecD (november 2010) 1.7 2.0 −
1 For Reuters and Consensus Economics surveys, in addition to the average value of the analysed replies (i.e. the medium value), we also indicate the lowest and the highest values to illustrate the distribution of the data.
2 Values calculated by the MNB; the projections of the named institutions for the relevant countries are adjusted with the weighting system of the MNB, which is also used for the calculation of the bank’s own external demand indices. Therefore, these figures may deviate from the figures published by the specified institutions.
3 OECD did not publish any information about Romania, therefore Romania is not included in our OECD forecast.
4 Data not adjusted for calendar-day variations.
5 Aggregate based on euro area members included in our external demand indices.
6 In 2012 the higher deficit figure reflects our rule-based forecast, while the lower deficit figure presents the effect of the Széll Kálmán-terv (Széll Kálmán plan).
* Average of midium range forecasts
** Without incomes from private pension funds.
Sources: Eastern Europe Consensus Forecasts (Consensus Economics Inc. [London], March 2011); European Commission Economic Forecasts (November 2010); IMF Country Report No.11/35 (February 2011), IMF World Economic Outlook Database (October 2010); IMF World Economic Outlook Update (January 2011); Reuters survey (March 2011); OECD Economic Outlook No. 88 (November 2010).
Based on the cyclical developments experienced in 2010, a larger than expected part of the decline in capital investment during the crisis can be considered as permanent, and thus the trend seen in capital investment may be lower than what is presented in the baseline scenario. With the exceptions of a few large individual projects based on previous business decisions, corporate investment is rather weak, which pose risks for the future as well. In the model this has two effects. First, in the initial condition, the output gap is narrower; second, looking forward the potential growth rate of the economy might be lower. In this case, compared to the baseline scenario, capital investment and GDP are expected to increase more moderately in the next few years. GDP growth would not accelerate compared to the dynamics observed at end-2010, and could hover around 2-2.5 per cent until end of next year. All this will have an impact on the initial value of the output gap: in our alternative scenario, this may be 1 per cent narrower than in the baseline scenario. The disinflationary effect of the narrower output gap is also smaller and the interest path also shifts slightly upwards;
nevertheless, even in this case significant monetary tightening will not be required.
Similar to our previous projections, we still consider developments in bank’s lending activity highly uncertain.
The starting point for credit developments is the equilibrium of credit supply and demand. In this simulation, we have modelled the restriction of credit supply, thus we have presumed that along the entire projection horizon (household) credit conditions have remained tighter than those included in the baseline scenario. In this case resources available for consumption are lower by a similar magnitude as the real pension fund yields increase it. Lower consumption demand entails stronger disinflation, which will, in turn, allow gradual easing in 2012. in sum, due to
2 the impact of alternative scenarios on our forecast
We wish to illustrate the risks around the baseline scenario by presenting three alternative scenarios. In these three scenarios the permanence of the decline in investments, banks’ propensity to lend, and the uncertainties surrounding cost shock pass through are presented. Overall, we may conclude that monetary policy responds to the shocks and offsets most of the inflationary effects. In line with this pattern, the shifts in the inflation paths are smaller and those in the GDP paths are larger in the alternative scenarios.
Chart 2-1
effect of the alternative scenarios on our inflation forecast
2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0
2010 2011 2012
Per cent
2.5 3.0 3.5 4.0 4.5 5.0 5.5 Per cent 6.0
Baseline scenario
Permanent decrease in the trend of investment Strict credit conditions for households Larger pass-through of cost shocks
MAGYAR NEMZETI BANK
Chart 2-2
effect of the alternative scenarios on our GDp forecast
−1.0
−0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0
2010 2011 2012
Per cent
−1.0
−0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Per cent 4.0
Baseline scenario
Permanent decrease in the trend of investment Strict credit conditions for households Larger pass-through of cost shocks
the effect of looser monetary conditions and lower demand the inflation path would be very near to that of the baseline, while GDP growth rate would be lower till mid-2012.
The most recent inflation data suggest that, due to the negative output gap, cost shocks fed through to the core inflation to a far less extent than previously observed. In light of the above, with moderate inflation pass through in the baseline scenario, we expect weak second-round effects, and recovery in profitability in the corporate sector will take place through more moderate wages. In contrast, in the risk scenario we assume that if the inflationary expectations are insufficiently anchored then simultaneously with cyclical recovery nominal wage rises may be higher, and the corporate sector integrates cost pressure into its prices to a greater extent. Thus monetary policy will perform substantive tightening already in 2011, and interest rates will not have decreased to 6 per cent even by the end of 2012. among the three risk scenarios, this would have the most significant inflationary impact. According to our simulation, despite the reaction of monetary policy, inflation would be higher by 0.5 per cent than in the baseline, while the impact on GDP would be negligible (chart 2-1 and 2-2).
3 financial markets
Global market sentiment is basically determined by the favourable global economic growth prospects and the increased sovereign risks emerging in the euro area. In addition, the tensions in North African countries and the earthquake in Japan have had an unfavourable impact on the risk appetite of investors. According to the developments in risk premia, investor sentiment towards emerging markets remains basically positive. However, capital inflow slowed down in some Asian countries, while in certain countries it has been halted completely.
Besides global sentiment, country-specific factors also affected domestic asset prices. At the beginning of the period, the credit rating agencies downgraded the rating for the sovereign Hungarian debt, which, however, prompted no significant, permanent market reactions. The rate hike cycle commenced at the end of November may have stepped up demand on the part of non-residents for assets denominated in forint, which is reflected mainly in the portfolio of assets with short-term maturity and in the appreciation of the forint exchange rate. The risk assessment of Hungary was determined by expectations concerning government measures aiming at structural reforms. The markets have displayed high expectations and moderate optimism as regards these measures since January. Most of the risk premium indices have decreased since the beginning of the year and the portfolio of government securities held by non-residents has undergone a steep increase. The composition and extent of reforms announced at the beginning of March were to a large extent in line with expectations, therefore no material change occurred in market trends.
3.1 International financial markets
International financial markets have been characterised by larger-than-usual volatility in the period since the November report. Variability in investor sentiment was influenced partly by favourable growth prospects in the global economy, and partly by higher sovereign risks in the euro area. Equity indices in developed and emerging economies continued to rise, with a reduction in corporate risk premia as well (see Chart 3-1). The favourable market developments are attributable to macroeconomic data and profits in the ongoing reporting season suggesting better-than-expected economic recovery. Increasing commodity prices are an unfavourable consequence of the improved outlook for economic activity.
The rise in risk premia due to uncertainties around the fiscal sustainability in certain member states of the euro area, however, has had an opposite effect. In certain periods, elevated sovereign risk had an unfavourable effect on the risk appetite of investors even on a global level.
These developments, however, had the potential to reverse the positive trends in financial markets on a temporary basis only (see chart 3-2). Despite considerable increases in Irish and Portuguese risk premia in successive waves in December and January, the European Commission − by raising the funds available in the EFSF (European Financial Stability Program) − gave an institutional response to the debt problem whereby it could prevent the sovereign debt problems from spreading to other countries and financial markets for the time being.
At the same time, global risk appetite was unfavourably affected by concerns around tensions in Northern African countries and the economic consequences of the earthquake in Japan. Data at our disposal allow no sound judgement as to the durability of the market effects resulting from these developments.
According to the developments in risk premia, investor sentiment towards emerging markets remains basically positive. However, capital inflow slowed down in some Asian countries, while in certain countries it has been halted completely. It is worth noting that there are three risk factors that can hamper capital flows to the entire set of emerging markets: significant deterioration of growth Chart 3-1 VIX index (right-hand scale)
Chart 3-2
CDS spreads in selected eurozone countries
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