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Hungary economic 'fairy tale' comes true, or so it seems

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(Globalpost/GlobalPost)

When Hungary's economy minister predicted a year ago an economic "fairy tale" for Hungary in 2013, few believed him. But recent data from the central European country show he might have been right.

Figures out last week confirmed that the non-eurozone EU member emerged from recession in the first quarter, notching up growth of 0.7 percent, leading several analysts to hike their forecasts for the year.

The contrasted with dismal growth figures from fellow European emerging economies like Poland and the Czech Republic, where output slumped 1.1 percent in the quarter as exports to the eurozone slumped.

While Prime Minister Viktor Orban's comments that Hungary's growth rate could be the highest in the region as soon as 2014 "may be just politicking and prove too optimistic ... Orban has strong arguments to back his statement," BNP Paribas economists said in a recent note.

Hungarian inflation tumbled in April to 1.7 percent, the lowest since 1974, allowing the central bank to cut its main interest rate for the 10th month running in May, further helping its economy.

Further good news is that the European Commission has proposed removing Hungary from special fiscal monitoring in recognition of Budapest cutting its deficit to levels only dreamed about in much of the eurozone.

Brussels has been keeping a close eye on Hungary's public finances ever since the country joined the European Union in 2004, and being let off the hook will mean that it can look forward to EU regional funding.

Part of the reason for Hungary's economic rebound has been Orban's "non-orthodox" policies, some of which have put more money in people's pockets, giving a fillip to consumer spending, and have eased inflation.

A drop in industrial output, meanwhile, has been attenuated by good news in the auto sector.

"The Hungarian economy has the good fortune to have factories of high-end carmakers like Audi and Mercedes, because these brands have been less affected by the crisis," said Zoltan Arokszallasi, analyst at Erste Bank.

The question however is whether this recent good performance is sustainable, or whether the positive effects from Orban's policies will be a good thing in the longer term.

Hungary's credit rating remains rated at "junk" by all the main agencies, meanwhile.

"To have strong and sustainable growth we need to have a turnaround in direct foreign investment," said Zoltan Torok, economist at Raiffeisen Bank.

These vital investments -- testament to foreign companies' confidence, or lack of it, in a country's prospects -- slumped 8.7 percent in the first quarter, according to rating agency Moody's, with many firms spooked by Orban's policies.

Moreover, faster economic growth -- which may falter, depending on Europe's overall performance -- may push up inflation again, potentially stopping the central bank further lowering interest rates, experts say.

Banks, too, remain reluctant to lend money to small businesses and have been hit by special taxes. A new central bank effort to boost lending "is good but not enough," said Raiffeisen's Torok.

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http://www.globalpost.com/dispatch/news/afp/130611/hungary-economic-fairy-tale-comes-true-or-so-it-seems