Although Hungary’s economy contracted in the first quarter of 2021, analysts expect the country to return to growth throughout the year and predict a swift recovery from the malaise caused by the coronavirus epidemic. According to current market expectations, the nation could see GDP growth of around 6% this year.
Hungarian economic output declined an annual 2.3% in the first quarter, according to preliminary data released by the Central Statistical Office (KSH) this week. The economy contracted by 1.8% based on seasonally and calendar year-adjusted data. The first-quarter reading shows the smallest contraction since the start of the coronavirus crisis.
Reason for optimism
When compared to the previous quarter, GDP grew by 1.9% in the first three months of the year, marking the third consecutive quarter of growth. The KSH said that the main drivers of growth were industrial output, financial and insurance activities as well as the information and communication industry (ICT).
“Defying all expectations and the third wave of Covid-19, the Hungarian economy put in an extraordinary performance in the first quarter. This gives a significant boost to the 2021 outlook,” analysts at ING Bank in Budapest wrote in a research note. The “mindboggling 1.9% GDP growth rate in the first quarter” indicates that a double-dip was clearly avoided and propelled Hungary’s economic performance way ahead of the -0.6% quarterly contraction recorded in the Eurozone, the note said. ING analysts predict that Hungary may be able to reach the pre-crisis level of real GDP during the second quarter of 2021, as the pace of economic rebound is better than the most optimistic expectations. The note says that economic expansion of 6% or more this year seems realistic.
Faster than expected recovery
Finance Minister Mihály Varga stressed that the country’s economy started its recovery at a far faster clip than expected, achieving the highest growth rate in the European Union on a quarterly basis. The minister added that the economy may post double-digit growth in the second quarter of the year, resulting in an annual expansion of 4.3% in the full year.
Analyst and EU projections regarding Hungary’s economic performance underpin the minister’s optimistic outlook. The European Commission’s latest outlook predicts that Hungary’s GDP will climb 5% this year, which is higher than the body’s previous projection of 4% published in February. The EC sees average GDP growth for the European Union of 4.2%. “Household consumption (in Hungary) is poised to rebound thanks to steady real income growth, and the increasing ability and willingness, of consumers to spend once restrictions are lifted,” the EC said. The body stressed that a number of factors will help boost household income, including an improving labor market, the gradual reintroduction of an annual pensioners’ bonus, and a personal income tax exemption for Hungarians under 25 from 2022.
Hungary's GDP growth may reach 5% this year, Raiffeisen Bank analyst Zoltán Török said, adding that second-quarter growth could be in the double digits, according to a report by state news wire MTI. Hungary's use of vaccines from China and Russia, in addition to the ones provided by the EU, may allow a full re-opening of the economy in the second quarter, Török noted.
Meanwhile, Takarékbank analyst Gergely Suppan predicted full-year growth as high as 7% as a result of the stronger-than-expected first-quarter data.
Worrying development
Government spending soared in the midst of the coronavirus crisis as the state attempted to help the country’s ailing economy. A negative result of higher spending is that Hungary's state debt relative to GDP rose to 81.7% at the end of the first quarter, according to data published by the National Bank of Hungary (MNB). The ratio rose from 80.4% at the end of 2020 and 65.8% a year earlier. The government calculates with the state debt ratio falling to 79.9% of GDP at end-2021. Hungary's constitution stipulates that year-end state debt relative to GDP must decline until the ratio reaches 50%.
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