Deepening Uncertanties

Hungary’s worse-than-expected economic performance in the second quarter of 2020 may force the government to rethink this year’s budget and financing plan. The weak data could also compel the central bank to alter the course of monetary policy.

Hungary’s second-quarter gross domestic product dropped by 13.6%, according to raw data published by the Central Statistical Office. When adjusted for seasonal and calendar effects, the decline was 13.5% compared to the same period a year earlier. The reading is far worse than the government’s projection, which expected economic performance to fall by around 10% for the quarter. Minister of Finance Mihály Varga said in early August that the economy picked up slightly in June, but the GDP may still fall by 10% year in the second quarter. The minister added that economic output may shrink by 5% in the second half of the year, exceeding the previously expected, now apparently over-optimistic forecast of 3 percent.
Second-quarter data confirmed the earlier forecasts of some economists that the coronavirus triggered recession could be deeper and more painful than expected. The weak figures are fueling uncertainties in the market and raising questions as to whether the government’s budget for 2020 is still feasible.

A closer look at GDP figures
The recession seen in the April-June period is of historic proportions; the decline in Hungary’s economic performance was only 7-8% during the 2009 global financial crisis. Neighboring countries fared better in terms of economic output, with Poland, which recorded a contraction of 7.9% being the best performer in the central and eastern European region. In Romania, the economic decline was 10.5% while in the Czech Republic it was 10.7%. Slovakia’s GDP, which has a very similar structure to that of Hungary, shrank by 12.1%. Economists argue that the reason behind the deeper recession lies in Hungary introducing restrictive measures earlier than other countries in the region. More optimistic experts also stress that the economic rebound in the second part of the year may therefore be stronger in Hungary than in neighboring countries.

What comes next?
Under normal circumstances, a much smaller difference between the official government forecast and the actual data would trigger a negative rally in the markets. However, these are unusual times and policy makers in most countries are navigating uncharted waters. This could explain why forint or government bond investors did not panic when the GDP figures were released. Nevertheless, most market participants are eagerly awaiting the policy-level reaction of the government and the central bank to the weaker than expected GDP reading.
In June, the National Bank of Hungary struck an overly optimistic tone with regard to Hungary’s economic performance and even predicted moderate growth. “Overall, the Hungarian GDP may grow at a restrained pace in 2020. Economic growth is expected to be 0.3–2.0% in 2020, 3.8–5.1% in 2021, and 3.5–3.7% in 2022,” the monetary authority said in a statement.
That was in sharp contrast with market projections and the forecast of international institutions such as the European Commission or the International Monetary Fund.
“In light of the second-quarter GDP figure, it would take a miracle for the Hungarian economy to be able to grow in 2020,” Péter Virovácz, lead economist at ING Bank in Hungary told news website portfolio.hu. He added that the central bank has so far kept its GDP forecast in the positive range, perhaps to improve economic sentiment. However, the bank will have to review its forecast thoroughly in the September inflation report, in light of the poor second-quarter data.
Similarly, the Finance Ministry will most likely be forced to revisit the projections of the 2020 budget, which predict an annual recession of 3% for this year and a budget deficit of 3.8% of GDP. The weaker-than-expected quarterly GDP figure will worsen the annual GDP forecast by at least 0.5 percentage point, and if GDP shrinks more than expected, that will also increase the deficit-to-GDP ratio. Péter Virovácz does not rule out that the Ministry will raise the annual deficit target to as much as 8-10%. Should that be the case, the State Debt Management Agency will also need to rewrite its annual issuance plan and boost the sale of government debt. This, in turn, will affect the central bank’s monetary policy.
Although a recovery from the economic shock seems to have started in the third quarter, uncertainties surrounding the speed of revival have not disappeared yet, especially given increased fears of a second wave of the pandemic, Erste Group said in a reaction to the GDP data. “All in all, we expect positive quarterly figures for the second half of the year; however, they are unlikely to bring the yearly figures into positive territory. Our current forecast for the 2020 annual GDP is -4.6%. However, given the deeper recession published for 2Q, we see risks pointing somewhat to the downside,” the analysts at Erste said.