Out of the Woods?

After the pandemic decimated Hungary’s economy last year, the question on everyone’s mind is whether the nation’s GDP will be able to climb out of the hole. While the National Bank of Hungary is confident that 2021 will be a strong year for the economy, the country’s protracted struggle to stem the spread of the epidemic casts a long shadow over that assertion.

The National Bank of Hungary (MNB) expects Hungary’s GDP to grow by 4-6% this year, according to forecasts from its latest quarterly Inflation Report released earlier this week. The central bank had projected a growth rate of between 3.5% and 6% in its previous report published in December. The current forecast is close to the finance ministry’s GDP growth estimate of 4-5% percent for this year. The central bank sees the economy expanding by 5-6% next year and by 3.5% in 2023.

Fell off a cliff
The coronavirus epidemic had a ravaging effect on Hungary’s GDP last year. The nation’s economy shrank by an annual 3.6% in the last quarter of 2020, putting the full year decline to 5%. On the production side, services continued to be the biggest drag on growth, accounting for 3.2 percentage points of the headline decline in the fourth quarter. As domestic and international tourism drew to a virtual standstill amid a second-wave restrictions, the output of commercial accommodations and catering plunged 51.1%. On the positive side, the information technology sector’s output climbed 6.3% and the output of the financial and insurance sector grew 3.3 percent.

Government optimism, central bank criticism
Commenting on the GDP data, Finance Minister Mihály Varga noted that the Hungarian economy was more resilient than that of Europe as a whole, and is set to bounce back faster than after the crisis in 2008. He added that the crisis found Hungary in a much stronger position than it was in 2008. The government’s action plan to re-start the economy – details of which are still missing - is expected to bring about growth of 4.5% this year, the minister said.
His comments are in contrast with central bank Governor György Matolcsy’s view of the government’s performance. In an opinion piece published earlier this year, the head of the National Bank of Hungary, criticized the government’s approach towards economic policy, claiming that currently the country does not have a unified and clear vision for the future. He argued that the Estonians performed far better than Hungary in terms of economic catch-up, and that we should follow their example. Matolcsy highlighted that Estonia has caught up to the EU average from 64.6% to almost 84% between 2009 and 2020. This performance has brought the country closer to the level of developed European countries by nearly 20 percentage points. In comparison to Central European countries, Poland came closer to the EU average by 13 percentage points, Hungary and the Czech Republic by less than 10 percent, and Slovakia even dropped 2 percentage points. “We need a strong vision, a good strategy, a complete digital transition, high investment rate, sustained dynamic productivity growth, wage catch-up, repatriation of workers abroad, low public debt, a strong technology sector, many innovations and world-class universities,” Matolcsy said.

Analysts optimistic for 2021
Economic analysts noted that the latest GDP data promised a significant rebound potential and possibly faster growth in 2021 than was originally estimated. Péter Virovácz, an economist at ING Bank, expects growth to reach 5.4% in 2021. With such rebound, the economy may recover losses incurred during the pandemic by the end of 2021, he said. Gábor Regős of pro-government Századvég Gazdaságkutató said growth may even surpass 5% if restrictions are lifted swiftly. If pandemic-related restrictions stay in place for a longer period, “the consequences may be incalculable,” he added.

Virus to decide spending
Hungary’s budget for 2021 and 2022 will be determined by state spending related to the coronavirus pandemic, Péter Benő Banai said in an interview with daily newspaper Magyar Nemzet. The government spent around 1,000 billion forints (EUR 2.7bn) on health-care measures against the coronavirus pandemic since its emergence in March 2020 while expenses related to the protection of the economy came to some 4,000 billion, Banai, State Secretary for Budgetary Affairs, said. Protection measures taken since last March were responsible for the 2020 deficit coming to an estimated 8% of GDP rather than the expected 9%, Banai said.
The 2021 budget will be determined by how much will be spent on the pandemic and the restart of the economy, according to the government official. To that end, the government will probably propose amendments to the budget during the spring parliamentary season, to “incorporate a higher deficit than expected, as well as a lower debt forecast.” In 2022, the budget will include the tax exemption for all Hungarians under the age of 25, a measure decided in early 2021, and will continue to re-introduce the pension bonus, he said.