Recovery can start in 2021 after a difficult period

As a result of the measures against the coronavirus, the performance of the Hungarian economy in the second quarter was significantly lower, by 13.6, compared to last year. The crisis has been felt by most sectors of the economy, but to varying degrees. For example, tourism, vehicle manufacturing or the entertainment industry have been affected much more severely than the average, while the ICT or financial sector has been less affected by the crisis. At the same time, the recovery began with the lifting of restrictions, which is also shown by the fact that the volume of retail turnover already reached that of last year in July. In the case of several sectors (such as tourism and vehicle manufacturing already mentioned), it is only possible to reach the previous level of volume over a period of several years due to the change in demand.

After the increase in consumption before the crisis, and then its decline and rise to the previous level, we expect that the volume of household consumption expenditure may stagnate in 2020, while in 2021 it may grow by about 4 percent.

Investments are also affected by the situation caused by the virus, which can be curbed by businesses, state and municipal actors alike due to a more uncertain economic vision and the scarcity of financial resources. This can be partially compensated by public loan programs, which cheaply provide resources to businesses. When estimating the investment volume, we also had to take into account the previously high investment value and the cyclicality of EU funds. Thus, in the case of investments, we presume a 4.9 percent decline, while next year we presume a 3.1 percent expansion.

In the case of exports, first there was a significant slowdown due to supply chain disruptions and then a drop in demand, and the recovery also appears to be slow. We expect an 8.6 percent decline in 2020, followed by a 7.2 percent rebound in 2021. In addition to the development of consumption, investment and exports, the development of imports is determined by individual items such as the purchase of health equipment. The decline in imports could thus be 3.6 percent this year, which might be followed by a 5 percent expansion next year.

Regarding the labor market, employment was reduced by more than 100,000 when restrictions were imposed. Some of the jobs were reopened with the relaunch of the economy, thus some of those who became unemployed were able to get a job. However, given the slower relaunch of some sectors, the previous high level of employment will only recover slowly, thus, this year, the unemployment rate could be 4.2 percent and next year 3.7 percent as an annual average. A relatively small increase in unemployment is supported by the pre-crisis labor shortage and the high number of job vacancies. However, regarding the full recovery of the previous labor market situation, the question is not only the development of the unemployment rate but also whether those who have entered part-time employment can return to full-time work again. This requires the relaunch of the most severely affected sectors.

Inflation has been around the top of the central bank's target range in the recent period, and core inflation, which describes the underlying processes, has substantially exceeded it. The increase in the pace of monetary deterioration was driven by rising food prices and the weak forint exchange rate, while it was held back by fuel prices. Inflation may be around 3.7 percent this year and 4.1 percent next year, assuming that the forint does not further substantially weaken.

The coronavirus epidemic has had a significant impact on both the revenue and the expenditure side of the budget. Regarding the revenues, in addition to the measures taken (tax relief, payment facilities, extension of the tax return deadline), the deteriorating economic performance also reduced the amounts received by the state treasury. The expenditure side has been substantially determined by the measures for the protection of jobs, help in the protection of health and the restart of the economy. Overall, as a result of the preventive measures against the pandemic and the decline in economic performance, we forecast a deficit of 7.3 percent of GDP this year, which may drop to 3.5 percent next year. As a result, public debt may reach 75.6 percent of GDP in 2020, from which it may decline to 73.3 percent in 2021, provided that the budgetary discipline is strengthened next year.