Hungary’s economy is expected to make a strong comeback this year following the ravaging impact of the Covid pandemic. The International Monetary Fund and the European Bank for Reconstruction and Development are the latest to project that GDP growth is set to exceed earlier expectations.
The International Monetary Fund (IMF) raised its forecast of Hungary’s economic growth to 6.2% in 2021, from a projected 4.3% in May earlier this week, citing a “large and timely” fiscal policy response to the economic fallout caused by the coronavirus pandemic. The IMF’s latest forecast significantly exceeds the government’s official projection for GDP growth of 4.3% this year.
“Following first-quarter outcome, a strong recovery is expected to take hold in 2021. Growth is projected around 6%, driven by net exports, as external demand improves, and recovering consumption supported by fiscal outlays, still fast-growing private wages, and accumulated households' savings,” the Washington DC-based IMF said in a press release.
It noted that the economy suffered a severe blow from the pandemic, with the economy contracting 5% in 2020, budget deficit widening to 8.1% of GDP and public debt rising above 80% of GDP.
The IMF highlighted that headline inflation will temporarily increase in the short run before returning toward 3½% while unemployment is expected to gradually return close to pre-crisis levels. “Yet, uncertainty remains significant,” the IMF added.
EBRD joins the club
The European Bank for Reconstruction and Development (EBRD) joined the ranks of the IMF this week by raising its forecast for Hungary’s 2021 GDP growth to 5.5% from a projection of 4% published in September 2020. The EBRD expects economic growth to slow to 4.8% in 2022. This year, economic recovery will likely be driven by investments, propelled by higher FDI inflows and the EU recovery fund, and improving household consumption thanks to accumulated savings during the lockdown periods, the EBRD said.
The bank highlighted that the high vaccination ratio in Hungary, the highest in the central and eastern European region, will likely cushion the economic impact of a potential new wave of the pandemic.
Finance Minister Mihály Varga noted in a post on his social media page that the European Commission also raised its estimates of Hungarian economic growth in the past few weeks. The country recently jumped five places to rank 42nd in the report published by the Swiss IMD World Competitiveness Center, he added.
Forceful government decisions
The Hungarian government will have to make “unexpected, forceful and serious decisions” with regard to the Hungarian economy in order to achieve 5.5% GDP growth in 2021, Prime Minister Viktor Orbán said at a press conference this week. If growth reaches that level, the government will be able to afford a tax refund for families, Orbán said. Under the government’s proposal, low-earning parents will be allowed to reclaim the personal income tax they pay in 2021 next year. The step would cost the budget as much as HUF 580 billion.
“Unless the operative body overseeing the relaunch of the Hungarian economy, headed by Minister of Foreign Affairs and Trade Péter Szijjártó, submits 15-20 forceful and surprising measures to the government in the coming weeks, the 5.5% growth will not be achieved,” Orbán said. The premier noted that the steep increase in the price of construction materials has led to “serious problems” in the construction industry and the government may discuss countermeasures in the short run.
The premier announced earlier that the government aimed to raise the minimum wage gradually to HUF 200,000 (EUR 575). He warned, however, that a hasty hike could lead to small and medium-sized enterprises breaking under the strain, as well as to layoffs and to growing numbers of jobseekers rather than full employment. The minimum wage hike would possibly happen in two phases, he said, alongside considerable tax cuts for SMEs.
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