Double Dip Avoided

Defying all expectations, the Hungarian economy expanded in the fourth quarter of 2020. This gives a significant boost to the 2021 outlook.

Expectations had not been particularly high for fourth-quarter economic activity in 2020. Nevertheless, Prime Minister Viktor Orbán suggested the economy probably contracted by 5.1% to 5.2% in 2020 as a whole, meaning borderline growth in the fourth quarter in a quarterly comparison. The premier’s cautious optimism was far surpassed by reality as shown by the preliminary fourth-quarter GDP data.
Hungary’s economy grew 1.1% in in the last three months of 2020 on a quarterly basis, despite a lockdown from mid-November, according to a first estimate from the central statistics office KSH. Analysts had forecast a quarterly decline of 0.4%. Hungary performed much better than the EU (-0.4%) and the Eurozone (-0.6%), continuing the catch-up even in a recession year.

Unexpected growth
Despite the restrictions, which included a lockdown and the mandatory closure of hospitality services, the economy was able to muster growth at the end of last year, fueled by the strong performance of industry and the construction sector, while the retail sector was stable.
Although the statistical office didn’t release detailed data in its flash report, it highlighted that industry and information and communication sectors were the most important positive contributors. Besides that, the positive surprise might also stem from financial services (due to the lending activity). It seems that despite the tightened containment measures, some of the sectors in services were also able to perform better than anticipated.
Annual data was also stronger than expected, showing a 3.7% decline in the fourth quarter, less than the 5.5% contraction expected by the market.
For the full year, the economy shrank 5.1%, which was below the 6.4% EU average and was less severe than the government’s forecast.
Last year’s decline was the third worst economic performance in the last three decades. After the change of regime, the economy collapsed 11.9% and in 2009, during the global financial crisis, GDP slumped 6.6%.

Epidemic-ravaged economy
In 2020, Hungary was on track for another year of growth close to 5% as in the previous two years. The onset of the pandemic ravaged Hungary’s export-oriented economy in the second quarter, resulting in a steep annual decline of 13.7% after 1.9% growth in the first quarter. In the third quarter, economic output contracted 4.8% from a year earlier.
The second wave of the coronavirus epidemic was less damaging than the first one in the spring, according to preliminary data. KSH figures show that quarterly growth was supported by industry and the ICT sector.
The market was taken by surprise by the figures, which exceeded even the most bullish projections. That degree of growth, against the backdrop of tighter pandemic restrictions from November, shows Hungary's economy has a bigger than expected potential for recovery, said ING Bank chief analyst Péter Virovácz.
In light of the economy’s performance in the last quarter of 2020, there is a market consensus that the favorable data foreshadows a boom in the economy in 2021.

Brighter prospects
Finance Minister Mihály Varga highlighted that the decline in Hungary's GDP last year was smaller than the 6.4% average drop in the EU. Hungary is ahead of countries like Austria, Belgium, France, Italy, and the Czech Republic, he added.
The minister noted that the data reflects the resilience of the economy and the impact of government stimulus. The government had supported investments to the tune of HUF4 trillion last year, which helped Hungary to have one of the highest investment rates in the EU in 2020.
Varga stressed that further developments worth thousands of billions of forints will follow the measures of the government's economic recovery plan. The government expects a return to dynamic growth from the second quarter of this year and sees the economy expanding by 4-5% in 2021.
Analysts are also becoming more optimistic with respect to this year’s economic performance. “All in all, the resilience (of the economy) in the fourth quarter during the second wave (of the epidemic) imply significant upside risk related to our 4.3% 2021 GDP forecast. With today’s data, the probability of a 5-6% economic performance this year increases. This would also mean that Hungarian economic activity might be able to reach its pre-crisis level by the year-end,” economists at ING Bank said in a research note.