Hungary's Economy Contracts, Braces for Recession

By Zoltan Simon

Nov. 14 (Bloomberg) -- Hungary's economy contracted in the third quarter from the previous period as the global financial crisis engulfed the country, moving it toward its first recession in 15 years.

Gross domestic product declined 0.1 percent from the previous quarter, the Budapest-based statistics office said today based on preliminary data. Growth was 0.8 percent from the year- ago period, slowing from 2 percent in the second quarter. The median estimate of 17 economists in a Bloomberg survey was for annual growth of 1.2 percent.

The worldwide market crash and credit crunch is weighing on economies. Germany, Hungary's biggest export market, entered recession, exacerbating problems for the region's emerging markets. Hungary agreed to spending cuts to secure financing while the central bank raised rates to defend the currency.

``There is little doubt that Hungary will slide into recession in the near-term,'' Bartosz Pawlowski, a London-based analyst at TD Securities Ltd, said in an e-mailed note to clients. A recession is two consecutive quarters of economic contraction.

The forint weakened to 270.85 against the euro at 9:27 a.m., from 268.37 late yesterday.

The government, forced to borrow from the International Monetary Fund to avert a default, expects the economy to shrink next year for the first time since 1993, by 1 percent. The global crisis choked the recovery of Hungary's export-driven economy, which grew at the slowest pace in 14 years in 2007.

Production Drops

Industrial production dropped the most in more than 16 years in September as slowing growth in the euro region, which buys 57 percent of Hungarian exports, curbed demand for products assembled in the country such as Audi cars and Nokia phones. Output dropped 5.3 percent from a year earlier.

The economy of the 15 countries sharing the euro contracted in the second quarter for the first time since the common currency's creation. German gross domestic product fell a seasonally adjusted 0.5 percent in the third quarter after contracting 0.4 percent in the previous three months.

``Industrial production and construction were key'' sectors accounting for slowing growth, statistician Pal Pozsonyi told reporters today. The two sectors together account for a third of Hungary's GDP.

Hungary's growth slowed to 1.1 percent last year after Prime Minister Ferenc Gyurcsany raised taxes and cut subsidies to narrow the widest budget deficit in the European Union.

Domestic consumption is also being hurt by the financial crisis that forced the country to take out a 20 billion-euro ($25 billion) loan from the IMF, the European Union and the World Bank.

Retail sales fell for the 19th consecutive month in August as government measures to close the budget deficit sapped consumer spending. The government scrapped tax cuts planned for next year to reduce its reliance on foreign financing.

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net