Hungary’s Central Bank Strikes Optimistic Note

Last year, the Hungarian economy probably contracted by as much as 5.5% due to the coronavirus crisis, but GDP growth in 2021 may approach 6%, according to a recently published assessment by the National Bank of Hungary. The central bank identified the areas where the Hungarian economy performed well during the crisis and highlighted 8 features that need to be strengthened further.

The forecasts published by the National Bank of Hungary (NBH) this week outline a more optimistic economic scenario for this year than the central bank indicated in its Inflation Report in December. In the Inflation Report, policy makers predicted an annual economic decline of 6-6.5% for 2020, and this has now been softened to a recession of 5-5-5%. The latest forecast reflects the fact that the Hungarian GDP weathered the second wave of the epidemic much better than the first wave in the spring. The 5-5.5% decline is in line with analysts' expectations and those shared by Prime Minister Viktor Orbán last week.

Faster recovery in 2021
The central bank’s GDP forecast for this year is close to 6%, and this is in the upper range of the prediction (3.5-6.0) published in the December Inflation Report. The figure underscores a growing optimism on the part of the central bank regarding the strength of the economic rebound in 2021. Market expectations for this year’s economic performance move in an exceptionally wide range, depending on individual assessments of the epidemic and the vaccine situation, but it’s clear that the current NBH forecast is one of the most optimistic. The central bank didn’t publish details about the structure of this year’s economic expansion, instead provided an overall assessment of the economy in 11 + 8 points.
According to the experts at the central bank, although the performance of the Hungarian economy was probably average relative to other member states in the EU due to the structural features of the economy (high reliance on tourism and the automotive industry), economic performance excelled in a number of key areas. Central bankers highlighted the following strengths of economic performance:

1. High level of corporate lending
2. High level of investments in proportion to the GDP
3. Low unemployment level
4. Fast increase in average wages
5. Extensive general moratorium on loan repayments
6. Increase in retail lending
7. Subdued decline in household consumption by European standards
8. Swift increase in e-commerce volumes
9. Fast increase in the central bank’s balance sheet
10. Central bank demand for government securities grew at one of the fastest rates in Hungary.

Although the listed features are important for the assessment of economic performance, the central bank’s material does have a few shortcomings. It fails to mention the remarkably restrained state support offered to distressed sectors and businesses or the cumbersome and limited job retention programs.

Where more progress is needed
At the same time, the central bank identifies eight areas where more action is needed because "Hungary temporarily belongs to the weakest third of EU states," according to the assessment. “Improving these economic features represents a significant growth reserve for the coming years,” the central bank noted. These areas are the following:

1. A large decline in government expenditure relative to other EU states.
2. Significant decline in state investments
3. Shrinking of the added value of the construction industry
4. Collapse of the tourism industry
5. The low level of part-time employment
6. The shortness of the average remaining maturity of Hungarian public debt
7. The low amount of state guarantee programs
8. Low proportion of businesses using the e-commerce channel

European recovery may also be faster
The Hungarian central bank’s optimism for 2021 is echoed by a recent statement released by the European Commission. Even though the union is still in the grip of the epidemic, vaccinations have begun across the EU, which gives cause for cautious optimism, the Commission noted. As measures designed to curb the epidemic are eased, economic growth will also recover. Economies in the euro area and the EU are expected to reach their pre-crisis emission levels sooner than previously thought, mainly due to the stronger-than-expected growth momentum forecast for the second half of 2021 and for 2022, according to the Commission. The EU economy is forecast to grow by 3.7% in 2021 and 3.9% in 2022, the release said.
As national vaccination programs are ramped up and the lockdown and restrictive measures are gradually eased, economic growth is expected to resume in the spring and pick up in the summer. The recovery will also be facilitated by an improved global economic outlook. the Commission said.