Nicholas Watson in Prague -

The Hungarian government's fiscal austerity measures are really beginning to bite as GDP figures released Friday, September 7 showed the economy grew by just 1.2% on year in the second quarter, its weakest expansion in 11 years. The miserable figures were thrown into stark relief by data on the same day from the Czech Republic that showed its economy grew by 6.0% on year in the second quarter, while Slovakia's industrial production grew by 18.9% on year in July.

The 1.2% figure for Hungary was revised down from the 1.4% preliminary number and was hurt in large part by household consumption falling by 3.4% as real incomes fall. "The miserable performance is the direct consequence of the fiscal austerity measures," say analysts at Raiffeisen.

The government last year drew up a package of measure including tax hikes, subsidy cuts and spending cuts in order to rein in the budget deficit caused by the loose fiscal policy followed in the period of 2002-2006. The budget deficit at 9.2% of GDP was the biggest in the EU, but this package of measures is expected to bring down the deficit to 6.4% this year.

However, the danger is that painful economic downturn will cause the government to cave in to fresh street protests, which have plagued the government since Prime Minister Ferenc Gyurcsany was caught on tape telling supporters that his government had continually lied about the country's terrible public finances to win the parliamentary elections in April 2006.

Hitting rock bottom

The question is whether the economy has bottomed. Many economists think so, with the second half of this year mirroring the first half - poor third quarter, some improvement in the fourth. The full-year growth rate should come in around 2%, presaging a much better 2008 during as the economy responds to stronger investment and consumption. "Nevertheless, GDP growth around 3.3% in 2008 should still fall short of potential," says Raiffeisen.

In neighbouring Slovakia and Czech Republic the story is completely different. The Czech Republic's GDP grew 6.0% in the second quarter as household consumption put in a solid 6.5% rise on year, contributing 3.1 percentage points to the overall growth figure. The 6.0% number is a slight deceleration from the 6.4% growth seen in the first quarter.

Certainly no signs of deceleration in Slovakia, where July’s industrial production figures surpassed even the most optimistic forecasts with growth of 18.9% on year, accelerating from 12.0% recorded in June. The data underscored the outstanding performance of the automotive sector, which recorded further growth of 48.6% on year. This part of the economy has now added 78.7% on year for the first seven months of the year.

"Today’s data illustrate the excellent performance, which should continue for the rest of the year [with] the automotive sector and the electro-technical branch the main drivers of Slovak industry," says Miroslav Frayer of Komercni Banka. "This year, we expect further expansion of industrial production, gaining about 13% for the whole of 2007 but we would not be surprised by even higher growth."

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