Hungarian Economic Growth Slips to Slowest in Decade

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Hungary's economic growth faltered in the second quarter, slipping to the slowest pace in more than 10 years as measures to curb the budget deficit sapped consumer spending and the state reduced investment.

Gross domestic product rose an annual 1.4 percent, following a rate of 2.7 percent in the previous three-month period, the Budapest-based statistics office said today. The median estimate of 21 economists in a Bloomberg survey was for a 2.5 percent growth rate. Today's figure is the lowest since the third quarter of 1996.

Prime Minister Ferenc Gyurcsany has cut public jobs, raised taxes and slashed subsidies to meet European Union demands that he bring down the deficit, crimping household spending. Consumer confidence has declined and the government has slashed spending on infrastructure projects such as highways.

The forint weakened to 253.05 per euro by 9:17 a.m. in Budapest from 252.29 late yesterday. The currency has gained 7.25 percent in the past year.

Hungary's economic growth, the slowest among the EU's eastern members, may lose more speed. The government forecasts 2.2 percent growth this year, followed by 2.6 percent in 2008.

Slowing growth may help convince the central bank's 12 policy makers to cut the benchmark interest rate from 7.75 percent for a second time this year after a pickup in inflation caused a pause last month. Rate setters will next meet to decide about a possible rate change on Aug. 27 and nine of 10 economists in a Bloomberg poll expect a quarter-point cut.

The pace of economic expansion lags behind other nations that joined the EU in 2004 and this year. Poland on Aug. 29 may report 6.1 percent second-quarter growth, a Bloomberg survey shows. Slovakia today said its economy grew 9.2 percent in the same period.

Hungary has benefited from more than $65 billion of foreign direct investment since the collapse of communism 17 years ago.

The country now relies on exports from the local units of foreign companies and local manufacturers such as auto parts producer Raba Nyrt. and plastics manufacturer Borsodchem Nyrt. to drive economic growth. Their output helped keep the economy growing while consumer demand fell.

Industrial growth was an average 7.5 percent higher in the second quarter than in the same period last year. Exports rising 26 percent in dollar terms in the first half resulted in the trade deficit dropping by almost two thirds.

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