Boston, MA -- (ReleaseWire) -- 11/08/2012 -- Core Views: We still expect the Hungarian economy to contract in real GDP terms in 2012 despite the strong Q411 growth figure. All areas of the economy apart from the external sector will act as a drag on headline growth, and we anticipate only a tepid macroeconomic recovery in 2013 and 2014 as debt deleveraging and austerity are set to remain key dynamics over the medium term. Despite our expectation for Hungary's current account to remain in surplus territory in 2012, the country is in need of external financial assistance in order to improve investor confidence and stabilise financial markets. In particular, government borrowing costs need to come down from current levels in order to return the government's fiscal and debt dynamics to a sustainable trajectory. We anticipate a new IMF/EU deal to be reached in late Q212/Q312. The Fidesz administration has continued to enjoy a robust lead over major opposition parties in recent opinion polls. However, the weakening domestic economy and the potential for further financial market turbulence over the coming months certainly has the potential to diminish the government's support. Major Forecast Changes We have revised up our 2012 real GDP growth forecast to -0.5% from a previous forecast of -1.5% on account of the strong growth recorded in the fourth quarter of 2011. However, we still expect household expenditure, gross fixed capital formation and government spending to all register real declines this year. We have revised up our current account surplus forecast for 2012 to 1.1% from 0.5% previously on account of the effects of depressed demand on the trade account. The current account will return to the red in 2014. Key Risks To Outlook The major risk to our forecasts at this stage remains the potential for considerable delays in the Hungarian government's attainment of external financial assistance from the IMF/EU. The longer official negotiations take to begin, the greater the likelihood that economic and financial instability will return, which would in turn dent economic confidence and raise the possibility of even tighter domestic policy. In this case, we would be prompted to revisit our growth forecasts.
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