The EBRD now sees economic growth in Hungary to reach a 1,2pc annual average this year instead of the 1.0pc the bank saw in May, but lowered its forecast for next year to 2.1pc from 2.3pc expected in May. Yr-on-yr GDP growth in Q4 2010 should be 0.4pc this year and 3.4pc next year in Hungary, according to EBRD.

    For the 29 countries under its brief, EBRD now sees economic growth to be 3.5pc this year and 3.9pc next year on average, instead of the 3.7pc and 4.0pc seen in May, explaining that fiscal tightening in Western Europe will make exports difficult for Eastern countries.

    Following six consecutive quarters of economic contraction which ended in Q3 2009, Hungary showed a second quarter of reasonably strong growth in Q1 2010, the EBRD said. Monthly data in May again pointed to strength in industrial production and exports, but also to continued weakness in domestic demand, which remains weighed down by still rising unemployment and weak household credit activity. Even though this revival in industrial activity is expected to decelerate in the second half of the year, the economy is likely to show modest growth for the whole of 2010.

    The transition to the new government in June was plagued by sharp market reactions to poorly communicated government statements on fiscal policy. Even though the new government re-committed to targets under the IMF programme, a review mission in mid-July revealed considerable policy differences, and offered little clarity on a further programme from October. Measures announced in the financial sector, including a temporary levy on all financial institutions, risk derailing any recovery in credit, which would further set back the recovery in domestic demand, the EBRD said.