Hungary’s foreign trade deficit was smaller in 2003 than in the previous year, GKI said in its most recent report, adding that the economy was driven by export and investments in 2004. Due to uncertain growth prospects in Western Europe, the rate of investments could slow in Hungary this year. Real wages grew 1% in the private sector and fell 5% in the public sector last year. The latter is partly due to the fact that public administration workers were paid their year-end bonuses as late as in January 2005. Still, turnover in retail trade was up 5.7% in 2004, partly due to a boom in constructions. This year, retail turnover could rise 3%–3.5%, the same rate at which real wages are expected to swell.

Inflation fell to 4.1% by January 2005 from 5.5% a month earlier. The National Bank of Hungary (MNB) cut its basic interest rate by 75 basis points. Analysts forecast inflation to drop to 4% in February and to rise modestly in the second half of the year, as food prices can jump this year after last year’s abundant crop and low prices.

The central bank is expected to cut its basic rate to 7% by the end of the year, while the Hungarian forint is likely to remain strong. Industrial output slowed down in Q3 of 2004 after soaring 10% in the January-June period, then started rallying again in Q4. Growth is likely to stay at the current level this year. Revenues from tourism are also expected to soar.

Current account deficit is expected to rise to €6.9 billion, but it could fall below 8% of GDP and net foreign direct investment could finance half of it, according to GKI estimates.