(Updates with government spokeswoman comments in paras 4-5.)
By Balazs Koranyi
BUDAPEST, Jan 14 (Reuters) - Hungary's economy will shrink much more in 2009 than earlier thought and this will force the government to redraw most of its economic plans, Prime Minister Ferenc Gyurcsany said on Wednesday.
The economy will contract by 2-3 percent, more than an earlier forecast 1 percent, Gyurcsany told public television M1, adding that the country was committed to cutting its budget deficit although all figures could yet be subject to change.
"The world economy is performing much worse than we had thought; this is a real world economic crisis," Gyurcsany said. "Circumstances have changed and when circumstances change, we have to redraw all of our plans."
Government spokeswoman Bernadett Budai said later that Gyurcsany had asked Finance Minister Janos Veres to prepare new economic forecasts for the year within two weeks.
"(Government) revenues can decline and without measures the (budget) deficit could rise," she told a news conference.
Poor industrial output data in the Czech Republic on Wednesday was the latest sign of downside risks to growth for central Europe's economies, as Germany, the region's biggest trading partner suffers.
Czech production shrank by 17.5 percent year-on-year in November, nearly twice as fast as the market had expected, while Slovakia's output recorded its biggest drop in 10 years.
Hungary has been one of the hardest hit of the region's previously fast-growing economies as heavy government spending, high household borrowing, and high external financing needs left the economy exposed to the world financial crisis.
Gyurcsany stressed that loosening spending controls to counter recession was unacceptable as Hungary strives to regain investors' confidence after it being forced to seek a $25.1 billion bailout from the International Monetary Fund last year.
But he added that no financial target, including the 2009 budget deficit target of 2.6 percent of gross domestic product (GDP) was untouchable.
"Not a single number is set in stone," Gyurcsany said. "The only thing set in stone is that we have to remain on, or near a path to (fiscal) balance."
WEAK CONSUMPTION, HOLE IN BUDGET
"With global liquidity and credit conditions tightening, (central European) countries now face a period of painful adjustment," UBS's Reinhard Cluse said in a note.
"The conclusion is a sober one: many countries in EMEA (Europe, Middle East and Africa) will suffer a sharp slowdown, and below-potential growth for quite a few years," he added.
Besides Europe's slowdown, the implosion of domestic demand will also maul Hungary's economy, economists said.
"Hungary's growth has been driven by lending based consumption but in November data, we saw a 50 percent drop in lending," KBC economist Gyorgy Barcza said. "This could mean that lending worth 2-2.5 percent of GDP is lost this year and that's going to contribute to the decline in demand."
Hungary's deepening recession has put a 200 billion hole in this year's budget, only part of which may be covered from the budget reserves, and this will require government action, Barcza said.
"If there's no room to cut expenditures, as the government says, then revenues have to be lifted," Barcza said.
While the economy will contract, inflation is falling much faster than earlier expected, but the central bank's room for manoeuvre to cut interest rates is constrained by its still fragile financial markets and currency.
The bank has said it expects to undershoot its inflation target and it needs to cut rates from the current 10 percent to boost the economy but financial stability is its priority now. (Reporting by Balazs Koranyi, editing by Stephen Nisbet)