Impacts of fiscal adjustments in Western European countries on the Hungarian economy

In the wake of the Greek debt crisis, concerns about the sustainability of public debt have intensified. As a result, from the summer of 2010 several euro area member states announced fiscal austerity measures. These adjustments have a significant impact on the economic outlook of the euro area and, indirectly, Hungary. Over the short term, the spending cuts will reduce demand and restrain inflation in the euro area, resulting in restricted export opportunities for the Hungarian economy. Fiscal adjustments in Western Europe cutting public expenditures by a total of 1 percent of GDP for a period of two years could lower the growth rate of the Hungarian economy by 0.2 percentage points each year. In the context of declining import prices and a downturn in domestic demand, inflation is expected to moderate, albeit to a negligible extent. Somewhat stronger effects should be expected if the debt crisis of the euro area’s peripheral countries escalates further, and the increasing domestic debt burden driven by rising risk premia undermine domestic demand more markedly over the short term.