Hungary’s Economy Expected to Stage Robust Performance

The Hungarian economy is likely to recover from the shock of the coronavirus epidemic at a much faster pace than previously expected, according to a biannual report by the European Bank for Reconstruction and Development (EBRD). The organization raised its forecast for Hungary’s GDP growth this year to nearly 8%, which is in line with the projection of the International Monetary Fund (IMF) and that of the government.

The economies of the central European and Balkans (CEB) region increased, on average, by 5.1% in the first half of 2021, as the majority of Covid-19 restrictions were lifted, according to the biannual report published by EBRD earlier this week. Although most countries managed to recover to pre-pandemic levels, elevated energy prices and shortages of components, chips and raw materials have already affected countries with significant shares of manufacturing in GDP, especially the Czech Republic, Slovenia, the Slovak Republic and Hungary. These disruptions in supply chains will likely weigh on the region’s export performance in the short term while increased utility prices will affect the most vulnerable households in the region. The resistance of some CEB economies to Covid-19 vaccination, as experienced in the Slovak Republic, Poland or Latvia, could lead to new sporadic lockdowns this winter, aggravated by possible new variants of the virus. However, funds from the EU’s Recovery and Resilience Facility are expected to boost the economic recovery further.

Bittersweet recovery
Output in the EBRD regions contracted by 2.4% in 2020 owing to the Covid-19 crisis. In 2021, a recovery has been gathering pace. Output in the EBRD regions expanded by 6.4% year-on-year in the first half of 2021, as people’s mobility returned to the levels of January-February 2020 and external conditions have turned more favorable. Industrial production and retail sales have rebounded. Exports of goods and services have increased, despite supply chain disruptions. Remittances have also increased in the second quarter of 2021 in some cases exceeding their 2019 levels. Tourist arrivals exceeded expectations in 2021 but remain significantly below their 2019 levels in most economies in the EBRD regions.
Against this backdrop, the organization expects the Hungarian economy to grow by 7.7% this year, up from an earlier projection of a 5.5% expansion, published in June. The EBRD noted that a minimum wage rise of close to 20% and a personal income tax rebate, both scheduled for 2022, are expected to boost household consumption.
Nevertheless, the report sounded a warning. ”While these are encouraging developments, the recovery is bittersweet. High prices of natural gas, oil and other commodities weigh on the trade balances. They may also test the public’s resolve for greening and put pressure on governments to step in to mitigate the burden of higher energy expenses on low-income households,” according to the EBRD. Soaring energy prices and the semiconductor shortage have a negative impact on the Hungarian manufacturing sector, especially the automotive segment, which is expected to weigh on Hungary’s exports in the short term, it added.
The EBRD sees Hungary’s GDP growth slowing to 4.8% in 2022.

IMF also optimistic on growth
The Washington D.C.-based organization expects the Hungarian economy to grow at the third fastest rate in the European Union this year, expanding by 7.6%, the IMF said. Such a growth rate would put Hungary after Ireland (13%) and Estonia (8.5%) within the EU. The IMF sees Hungary’s economy growing by 5.1% in 2022 and by 3.8 % in 2023.
The forecasts of the EBRD and the IMF are largely in line with the government’s projection for GDP growth of 7% GDP growth for 2021. The Cabinet expects the fourth wave of the coronavirus pandemic to be relatively weak in Hungary, due to the high inoculation rate of the Hungarian population, Finance Minister Mihály Varga said. The minister added that the economy will likely return to the growth path seen in 2019, albeit in a slightly different structure. Varga also warned about the deteriorating external economic environment, especially high energy and transport prices as well as tightening measures likely to be introduced by the US and European central banks. “Politically motivated debates” with the European Union are expected to “run their course” by the end of the year, clearing Hungary’s access to the recovery funding, Varga said.