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BUDAPEST, April 9 (Reuters) - Hungary's economy will contract a lot more than previously expected due to a steeper global downturn, central bank deputy governor Julia Kiraly told public television on Thursday.
Hungary, which staved off financial collapse in October by way of a $25.1 billion IMF-led loan, faces its biggest downturn in nearly two decades due to falling exports to western Europe, weak domestic demand and rising unemployment.
"The recession, which we have known for a year we would have to live with, will be much stronger," Kiraly said. "Primarily (this is) because the global recession will be much stronger." The National Bank of Hungary and the Finance Ministry expect a contraction of 3.5 percent in 2009, but officials have said that could be deeper, necessitating further spending cuts from the government to prevent an excessive budget deficit.
Analysts expect the economy to shed as much as 6 percent.
Kiraly said the new situation would put a strain on the government of prime minister designate Gordon Bajnai who is expected to replace outgoing Prime Minister Ferenc Gyurcsany in in a parliamentary vote scheduled for April 14.
"The budget's manoeuvring room, which has not been exactly wide, will decrease," she said.
Gyurcsany, who has ruled in a minority for a year, offered to step aside last month to allow the formation of a new government with broader backing to steer the central European country out of the crisis.
Bajnai, now economy minister, has gained political backing from the ruling Socialists and the opposition Free Democrats for his spending cuts, which will eliminate of curb many social expenditures but cut the incomes of wide swaths of society.
"There will be lower wages, higher unemployment," Kiraly said. "If they (citizens) have debt they try to pay it back, but there is a point where they must begin to think, do I pay the gas bill or my mortgage? And that can have bad consequences." (Reporting by Marton Dunai and Gergely Szakacs)