Projections and policy considerations, however, reflect the views of staff in the Monetary Strategy and Economic Analysis and Financial Analysis Departments and do not necessarily reflect the views of the Monetary Council or the MNB. Taking into account the basic assumptions (exchange rate of EUR/HUF 290 and oil prices around USD 50 per barrel, implementation of announced government measures), inflation may rise above 3% in the second half of the year.
SUMMARY
First, a deterioration in global business conditions may further reduce imported inflationary pressure in the short term. Second, the decline in domestic activity may lead to very low inflation in the medium term.
MAGYAR NEMZETI BANK
Summary table of the baseline scenario
Recession deepens across Europe
GDP growth of our main export partners
Industry production of the Eurozone, Germany and the region
Changes in the IFO 1 and EABCI* confidence indices
In contrast to the marked decline observed in previous months, the last data point in January indicated a small adjustment in some cases (IFO); In light of the historically low level at which the adjustment took place, we cannot yet conclude that a positive turn is in sight. In earlier quarters, crude oil, commodity and food prices fell sharply and stabilized at low levels, leading to a worldwide decline in inflation.
Changes in global commodity prices*
While household wage income showed a weak increase in the second half of the year, the combination of a worsening labor market environment and a sharp decline in credit availability may have dampened investment and consumption spending towards the end of the year. While business investment showed signs of a slight recovery in the first half of the year, data for the second half of the year suggest that businesses also began to significantly curtail their investment spending.
Contribution of major national economic sectors to total output*
In the last quarter of 2008, the deterioration of the overall macroeconomic environment caused a significant slowdown in industrial growth and the gross domestic product showed a 2% decline in annual terms. Changes in confidence indices reaffirm that sentiment regarding the outlook for all sectors is extremely unfavorable and has actually reached a historic low.
Changes in the sector confidence indices in Hungary
Rapid appearance of recession effects in the domestic growth path
Construction output rose slightly in the fourth quarter, largely reflecting a low base and ongoing highway construction projects and government-related enterprises. The deterioration of the trade balance – which had been observed since the middle of last year and was assumed to be temporary – stopped in the fourth quarter and showed signs of a slight improvement at the end of the year.
Changes in consumption side items
According to the labor force survey for the third quarter, the number of employees in the total economy increased by about 25,000, mainly in the private sector. As a result, further cuts in employment and slowed wage dynamics are expected in the coming quarters.
Employment and unemployment in the national economy
Despite the rapid deterioration of the macroeconomic environment, the third quarter of 2008 was marked by a delayed adjustment of wages and conflicting employment data. Since the rapid decline in production was only partially followed by movements in the labor market in terms of wages and the number of employees, labor costs per product unit increased.
Changes in unit labour costs in the private sector
Gradual wage and staff number adjustments
The inflation index of industrial products has declined in recent months, despite the weakening of the exchange rate. This means that weak household demand can offset the effect of movements in the exchange rate.
Rapid disinflation in 2008 H2
In the coming period, due to the current level of oil prices and the exchange rate, we cannot count on a continued rapid decline in inflation. This means that the disinflation period, led by rapidly falling commodity prices, may soon come to an end, and limited domestic demand may become an increasingly influential factor in the disinflation process.
Inflation developments
Changes in the consumer price index are mainly associated with commodity and food prices: while high commodity prices helped to maintain the price index at the beginning of the year, from autumn the index was moderated by falling food and commodity prices as the global output gap narrowed continued. A possible reason for the decrease could be a very positive turn in the prices of food and vehicle fuel observed in recent months, considering that household perceptions are the most sensitive for this product group.
Changes in the individual components of inflation
However, the disinflationary effects of the reduction in domestic demand were increasingly pronounced towards the end of the year. Although the decline in unprocessed food prices slowed somewhat by the end of the year, they continued to contribute significantly to the fall in the consumer price index through secondary effects. 4 Food and fuel prices played an important role in disinflation at the end of the year, as falling world oil prices sharply reduced domestic prices.
Inflation perceptions and expectations of households – Median survey
Significant volatility, slightly improving global market sentiment, active central bank
Changes in risk indices*
ECB base rate vs. three-month EUR interbank and government securities market yields
Asset prices in emerging markets
Policy rate expectations
As a result, the likelihood of the risk that relatively lower amounts could cause serious fluctuations in the exchange rate has increased significantly. As was the case with the exchange rate, the CDS spread of Hungary from November basically followed the changes in the global climate and, in contrast to the previous period, country-specific factors did not significantly affect it.
Changes in the exchange rates of the currencies in the region*
Given all this, the movements in the forint exchange rate broadly corresponded to those of the emerging currencies, especially those of the regional ones. In the first half of the period since November, spreads fell slowly and gradually until early January, when deteriorating investor sentiment again triggered a marked increase in spreads.
Developments in CDS spreads in some emerging countries
Consolidation of domestic liquidity problems, new MNB tools
Facilities and measures taken by MNB
In another positive sign, simultaneous use of overnight deposits and the BNB's lending facilities stopped, while demand for long-term loans has gradually declined. Banks no longer need the intermediary services of the MNB to eliminate counterparty risk.
FINANCIAL MARKETS AND LENDING
Developments in monetary conditions
Developments in monetary conditions
Developments in the forint/euro exchange rate
Decline in bank lending
Net quarterly growth of the corporate loans of the local banking sector, excluding exchange rates.
Net quarterly growth of the corporate loans of the domestic bank sector, excluding exchange rate
Net monthly growth of the household loans of the domestic bank sector, excluding exchange rate
However, it is important to note that credit activity in various sectors of the economy also depends to a large extent on credit demand. In addition to the usual baselines, the forecast assumes that the fiscal measures announced on February 16 will take effect.5 Regarding the economic outlook, we expect a slowdown in the Hungarian economy over the next two years.
INFLATION AND REAL ECONOMY OUTLOOK
Excluding the direct impact of tax increases, inflation is likely to remain below the medium-term target in both 2009 and 2010.6.
Changes in the basic assumptions of the forecast compared with the November Report*
We expect a period of protracted downturn
However, the positive effects will not be felt in the near term, our forecast horizon, as they will be diluted by lower demand due to tax increases and spending cuts. In addition to the increase in indirect taxes, household consumption will be limited by the reduction of transfers to households (stricter criteria for obtaining subsidies for gas and district heating, inclusion of family benefits in the tax base and changes to the rules on pension coordination). .
Government measures quantified in the forecast
The measures partly serve the budget adjustment in the short term, and partly the improvement of the long-term sustainability of public finances. In short, both external and internal growth factors point to a rapid recession in the short term.
Economic forecast for Hungary’s major export partners based on the EC’s current projection
Falling income and tighter lending standards are likely to reduce investment and consumption for all major domestic entities. However, it is still uncertain to what extent these companies will be able to capitalize on this in the short term amid declining demand.
Difference between the annual export dynamics and the annual growth of external demand
Although projects financed by EU funds have so far failed to really stimulate investment, the government's current intention suggests that a special emphasis will be placed on the implementation of these projects in the coming years. Our assumption is that in the unfavorable economic environment the tax burden of previously tax-free benefits will be borne by employees.
Trends in the use of household income
Although we expect an acceleration of nominal gross wages in 2010, a large part of the increase (more than 4%) is due to the abolition of tax-exempt benefits. As part of the adjustment process, the sector's investment expenditure - as a share of disposable income - may reach historic lows.
Growth projection
A further decrease in employment and stronger wage adjustment
Components of the unit labour costs of the private sector
Temporarily higher inflation due to tax increases
7 Similar to changes in VAT rates in the past, excluding the impact of tax increases from the CPI is a key methodological issue. Therefore, it stands to reason that if we exclude the impact of a 100% tax increase, we can easily underestimate inflation, which is important in an economic sense.
CPI projection*
- Inflation and growth risks
Our calculations show that not all of the impact of taxes is reflected in consumer prices. The impact of the prolonged turmoil in the global financial markets on macroeconomic trends has also become more accentuated in Hungary over the past months.
Fan chart of the inflation projection
Under this scenario, import demand from Hungary's major foreign trading partners will continue to decline in 2010. Overall, based on the risks presented above, the risks to the baseline scenario for economic growth are on the downside, while those for inflation are tilted slightly to the downside.
Fan chart of the GDP projection
The main causes of uncertainty in our current projection are external demand, lending activity and global market turmoil. This could be further reduced by the disinflationary impact of global commodity prices, which will most likely continue to fall.
Changes in our projections compared to November 2008
Forecasts of the GDP growth rate of Hungary's trading partners (annual growth rate, in percent).
MNB basic forecast compared to other forecasts
Developments in the general government balance
Based on the preliminary financial accounts, general government financing needs may have been around 3.1% of GDP in 2008. However, after closing the forecast, the financial close of the transaction still took place, which is likely to burden last year completely. although the final decision is not expected until March 2009.
Changes in the balance indicators of the general government
CHANGES IN GENERAL GOVERNMENT REVENUES
However, as a result of the changes in the tax system that were announced in February, the dynamics of the individual income items will also change to a certain extent. However, the abolition of the corporate solidarity tax will offset the increase in corporate tax revenues.
Nominal growth rates of major revenue items
CHANGES IN GENERAL GOVERNMENT EXPENDITURES
Among the government measures announced so far on the expenditure side, we have taken into account in our forecast the items that have been outlined in sufficient detail and which, according to the available information, can be realistically implemented. In 2009, the latest set of measures will mean a reduction of about HUF 200 billion on the expenditure side, which may facilitate the achievement of the deficit target, revised to 2.9%.
Net expenditures of budgetary units
The measures are aimed at reducing transfers to households on the one hand, and cutting the government's consumption and investment expenditure on the other. In 2009, around half of the expenditure reduction comes from falling government consumption, while the cut in transfers and government consumption in 2010 will contribute to the decline in deficit to a similar extent.
Pension expenditures
For 2010, the proposals that have been revealed and detailed so far amount to almost HUF 350 billion. Here, it is important to emphasize that the government's goal is a slightly larger reduction in expenditures, namely in the amount of HUF 500 billion, i.e.
GENERAL GOVERNMENT AND EXTERNAL BALANCE
The distribution of expenditure measures
Pension expenditure increased by more than 10% in 2008; of the determining factors, both the price index and the wage index played an important role. In 2010, the change of the Swiss index to indexation linked to economic growth, the end of the 13th month pension benefit for new retirees and other minor changes may somewhat slow down the increase in pension expenditure.
Interest expenditures
RISKS SURROUNDING OUR FORECAST
In these increases, in addition to the increases determined by the Swiss indexation method, one-time measures also played a role: the one-time increase in pensions, the introduction of the 13th month pension payment, the pension correction program, as well as the substitution effect. , which affects the composition of pensioners. Based on last autumn's decisions, 13th month pension payments have been maximized for 2009 and the pension adjustment program will only continue in September, helping to slow the pace of pension growth.
Net expenditures of budgetary units and pension expenditures
Over the past 10 years, nominal pension spending increased by an average of nearly 15% per year, which also significantly increased spending relative to GDP. The regulations regarding fringe benefits which are currently exempt from tax (eg meal vouchers, holiday vouchers, etc.) have not changed so far to make these benefits subject to taxation and the payment of contributions, and it may be that the changes apply to only part of the original full range of tax-free benefits.
Fan chart illustrating the uncertainty surrounding the fiscal deficit forecast
External balance
Components of the external financing requirement
Developments in the financing capacity of sectors*
On the other hand, the interest burden of the country's high external debt may continue to rise, as a result of the ongoing repricing of the overdue debt. It is worth mentioning that due to the high share of foreign currency-denominated external debt, the real economic balance-enhancing effect of the weaker exchange rate is tempered by the increase in the outflow of income on debt.
Implicit average interest rate of gross external debt*
The significant tightening of credit conditions as well as the elements of the fiscal package that make consumption more expensive can primarily force a strong adjustment of household savings. Due to the erosion of major tax bases (wages, consumption), the SNA deficit of the general government may increase even despite the fiscal measures.10 Yet the GDP-proportional external financing requirement of the country may still fall by almost 5 percentage points compared to the previous year.
GDP-proportionate net financing capacity of individual sectors
FINANCING THE CURRENT ACCOUNT DEFICIT
In 2008, macro vulnerability risks, which were in focus during the period of turmoil in the financial markets at the end of the year, increased on the financing side of the balance of payments. In parallel with this, a further shortening of the outstanding foreign debt is expected because, as a result of the general mistrust in the financial markets, the private sector probably only managed to roll over its obligations to shorter maturities at the end of last year.
Structure of the GDP-proportionate current account
As a result of heavy debt-generating financing, the country's net external debt continued to rise, reaching 48% of GDP at the end of the third quarter. Recent years have seen significant non-debt capital outflows, partly in the form of direct investment and partly in the form of portfolio-type share purchases.
Hungary’s gross short-term debt
Accordingly, from August 2007 to May 2008, due to the rise in food prices and the subsequent sharp increase in oil prices, we gradually increased our forecast. The MNB's forecasts and the median of the forecasts of the analysts participating in the Reuters survey are essentially identical for the entire period (as of August 2006, since then both types of forecasts have been available).
APPENDIX: EVALUATION OF OUR INFLATION FORECASTS FOR 2008
By quantifying the effects of assumptions, the analysis can shed light on how accurately our forecasting tools might capture actual trends. On the other hand, we also exclude the influence of regulated prices,12 which are also exogenous for our models, and the influence of fluctuations in the prices of rather volatile agricultural raw materials.
The MNB’s forecast and actual inflation in 2008
Until May 2007, we thought that the inflation-enhancing effects of the fiscal adjustment package of 2006 would diminish by 2008, and thus average annual inflation in 2008 could be close to the target consistent with price stability. Nevertheless, the magnitude of the forecast error over a year was relatively high, mainly caused by exogenous factors (global energy price increases, domestic regulated prices and volatile food prices).
The exogenous forecast error for average inflation in 2008
This error includes to some extent the changes in the inflationary effect of macroeconomic developments (labour market, economic activity) that differ from what was predicted, and also includes the error of the model used for the inflation forecast (i.e. the error that the model makes, even in possession of the actual figures of all explanatory variables). Based on the simulation – which eliminates the effect of exogenous factors – the average absolute error is very low, at 0.2 of a percentage point.
March 1999
June 1999
September 1999
December 1999
March 2000
June 2000
September 2000
December 2000
March 2001
August 2001
November 2001
February 2002
August 2002
November 2002
February 2003
May 2003
August 2003
November 2003
February 2004
May 2004
August 2004*
November 2004
February 2005*
May 2005*
August 2005 Boxes
November 2005 Boxes
May 2006 Boxes
November 2006 Boxes
February 2007 Boxes
May 2007 Boxes
Aug 2007 Boxes
Nov 2007 Boxes
February 2008 Boxes
May 2008 Boxes
August 2008 Boxes
November 2008 Boxes
February 2009
MNB OCCASIONAL PAPERS 2007–2008 (English language issues)
MNB WORKING PAPERS 2007–2008
Appendix
BAKOS PÉTER–BENCZÚR PÉTER–BENEDEK DÓRA: Az adóköteles jövedelem rugalmassága: becslések és rögzített adóelőrejelzések a 2005-ös magyar adóváltozások felhasználásával.
APPENDIX
