Downturn this year – bounce back next year


Since the previous quarterly forecast of Századvég Economic Research Institute in mid-March, the effects of the coronavirus on the Hungarian economy have been much clearer. However, it is important to stress that forecasting uncertainties remains significant, as the pace of external demand and thus the recovery of the Hungarian economy is not yet known, and neither has the pandemic threat completely disappeared, nor is the economic damage quantifiable.


The Hungarian economy has felt the effects of coronavirus restrictions in recent months: tourism has frozen, vehicle plants shut down for several weeks, and a partial curfew has reduced consumer demand. However, with the end of the first wave of the pandemic, the economy will gradually restart, although, for example, in the case of tourism, an overnight relaunch is not visible, one of the reasons which is that a significant part of the festival season has been canceled. Of course, Hungarians travelling abroad will be reduced, and more emphasis will be placed on domestic tourism. At the same time, according to our expectations, the decline caused by the coronavirus will be slighter in Hungary than in the European Union on average, which is partly due to the favorable baseline situation of the economy, and partly to the relatively rapid progress of the virus.

Nevertheless, the epidemic situation in the economy will not disappear without a trace: This year, the Hungarian GDP may be slightly more than 3 (3.1) percent lower than a year earlier. The massive decline of export, above 6 percent, will have a significant role in this, explained by the breakdown of tourism and the decline of industry. In the case of industry, the problem was initially caused by the procurement of raw materials and semi-finished products, while now the problem is more caused by the decline in external demand. Following the purchase of health care products, the decline in imports may be smaller than in exports, 5.2 percent, so the foreign trade balance may decline further this year.

There might be a decline in the volume of public and corporate investments, by 5.6 percent overall, according to our expectations. Although consumption was still the driving force behind growth in the first quarter, we expect a small decline of 0.3 percent for the year. This is explained by several factors: As a result of the partial curfew, several services became inaccessible, and it was more difficult to procure some products. In the longer run, temporarily rising unemployment and rising part-time employment will reduce demand.

As a result of the shutdowns following the coronavirus, some employees were dismissed, and although some of this workforce will be re-employed after the restart of the economy, the number of employed may be 100,000 lower than last year, and the rate of unemployment may increase to 4.7 percent. In parallel with the economic recovery, employment may start to increase again, although it is not expected to reach its previous, exceptionally high level even in 2021. Thus, the unemployment rate might be 4.4 percent next year.

In 2021, we expect the economy to bounce back, with expansion likely to exceed 5.0 percent. Within this, consumption, investment and net exports will all contribute to growth. Consumption growth may be 4.4 percent and investment growth 4.3 percent. Both exports and imports may show double-digit growth, which, in addition to the weak base period data, is explained by the fact that the investment rate will remain high this year despite the decline.

Inflation fell from 4.7 per cent in January to 2.2 per cent in May as a result of falling fuel prices in the wake of falling oil prices, while food prices rose dynamically, with the underlying inflation processes remaining strong. Thus, after this year’s 3.2 percent inflation, we expect a 3.7 percent money deterioration by 2021, as oil prices stabilize.

The coronavirus has also rewritten budgetary processes. Declining consumption and decreasing economic performance also have an impact on the revenue of the budget, while regarding expenditure, reallocations had to be carried out due to increasing health expenditure and the relaunch of the economy. However, fiscal policy is expected to remain tight, as far as possible, thus, the deficit will increase from around 2 percent in recent years to 3.9 percent this year and 3.3 percent next year. At the same time, government debt-to-GDP ratio will increase from 66.3 percent last year to 69.8 percent this year, then it will drop to 67.2 percent next year.

 

TABLE: FORECAST OF SZÁZADVÉG ECONOMIC RESEARCH INSTITUTE