(Updates with analysts, regional context)
By Balazs Koranyi
BUDAPEST, Jan 14 (Reuters) - Hungary's economy will shrink
much more in 2009 than earlier thought and will force the
government to redraw most of its economic plans, Prime Minister
Ferenc Gyurcsany said on Wednesday.
The economy will contract by 2-3 percent, more than an
earlier forecast 1 percent, Gyurcsany told public television M1,
adding that the country was committed to cutting its budget
deficit although all figures could yet be subject to change.
"The world economy is performing much worse than we had
thought; this is a real world economic crisis," Gyurcsany said.
"Circumstances have changed and when circumstances change, we
have to redraw all of our plans."
Poor industrial output data in the Czech Republic on
Wednesday were the latest sign of downside risks to growth for
central Europe's economies, as Germany, the region's biggest
trading partner suffers.
Czech production shrunk by 17.5 percent year-on-year in
November, nearly twice as fast as the market had expected, while
Slovakia's output recorded its biggest drop in 10 years.
Hungary has been one of the hardest hit of the region's
previously fast-growing economies as heavy government spending,
high household borrowing, and high external financing needs left
the economy exposed to the world financial crisis.
Gyurcsany stressed that loosening spending controls to
counter recession was unacceptable as Hungary strives to regain
investors' confidence after it being forced to seek a $25.1
billion bailout from the International Monetary Fund last year.
But he added that no financial target, including the 2009
budget deficit target of 2.6 percent of gross domestic product
(GDP) was untouchable.
"Not a single number is set in stone," Gyurcsany said. "The
only thing set in stone is that we have to remain on, or near a
path to (fiscal) balance."
WEAK CONSUMPTION, HOLE IN BUDGET
"With global liquidity and credit conditions tightening,
(central European) countries now face a period of painful
adjustment," UBS's Reinhard Cluse said in a note.
"The conclusion is a sober one: many countries in EMEA will
suffer a sharp slowdown, and below-potential growth for quite a
few years," he added.
Besides Europe's slowdown, the implosion of domestic demand
will also maul Hungary's economy, economists said.
"Hungary's growth has been driven by lending based
consumption but in November data, we saw a 50 percent drop in
lending," KBC economist Gyorgy Barcza said. "This could mean
that lending worth 2-2.5 percent of GDP is lost this year and
that's going to contribute to the decline in demand."
Hungary's deepening recession has put a 200 billion hole in
this year's budget, only part of which may be covered from the
budget reserves and will require government action, Barcza said.
"If there's no room to cut expenditures, as the government
says, then revenues have to be lifted," Barcza said.
While the economy will contract, inflation is falling much
faster than earlier expected, but the central bank's room of
manoeuvre to cut interest rates is constrained by its still
fragile financial markets and currency.
The bank has said it expected to undershoot its inflation
target and it needs to cut rates from the current 10 percent to
boost the economy but financial stability is its priority now.
(Reporting by Balazs Koranyi, editing by Patrick Graham)
