Economic forecast for Hungary (July 2020)

In its second-quarter forecast in July 2020, Kopint-Tárki lowered its projection for this year’s decline of the Hungarian economy from April’s 5.5% to 5.0%. This is largely due to the fact that the course of the pandemic was (at least so far) faster and milder than expected, which brought the restart of the economy somewhat forward.

After a relatively good performance in the first quarter (a growth of 2.2%), the second quarter’s results will come after a dramatic decline in April, and presumably further sharp falls in May and June. GDP is expected to shrink at a double-digit rate in the second quarter, as suggested by the large drops in industrial production data in April-May. Unless there is a strong second wave of the coronavirus returning, we expect that the second half-year should bring better economic indicators with the last quarter seen as close to stagnation.

In the industry an annual decline of around 10% is still expected, as the automotive and the mechanical engineering industries – which have the largest weight –  are expected to recover only next year, at the earliest. The construction industry might survive the year with a visible but not drastic (4-5%) decline: the crisis did disrupt production here, but has not paralyzed it. For the services sector as a whole the decline might also be less severe, although some service sectors (events, catering, tourism) were completely devastated by the pandemic, and for some of them, the crisis situation is expected to be long lasting. At the same time the performance of trade is likely to only slightly slow down due to the crisis, and the IT sector may even see growth in 2020.

Based on monthly data known so far, divergent trends can be observed with regards to consumption. Within domestic consumption, household consumption is somewhat better than expected, with the drop in retail sales declining to just a few percent in May and June. Kopint-Tárki expects a 2-3% decrease in private consumption in 2020, which is a smaller decline than forecast in the previous prognosis. The GDP forecast, more favourable than the one in April, is largely based on this change. On the other hand, in addition to the general decline in foreign trade, the crisis seems to have brought about the deterioration of the foreign trade balance and the widening of the negative gap between the export-import dynamic.

There is only sporadic and also contradictory news about investments. Some reports talk about halting or postponing corporate investments, others point to an impending “spin-up” of public investments. Both are true presumably, but knowing their ratios, investments are still to be dropping severely (by over 10%) in the second quarter and by 4-5% for the whole year.

According to our calculations, the annual general government deficit could be 5.2% of GDP. Out of the deterioration – which is substantial compared with the one planned – 3.1 percentage points can be explained by the recession, 2.3 percentage points by extraordinary government expenditures and stimulus measures, while their impact is somewhat mitigated by the extraordinary support from the EU and the budgetary reserve. According to our calculations, the government debt-to-GDP ratio will increase from 66.3% in 2019 to 74.6% by the end of 2020.

The annual rise in consumer prices could be at 3.2-3.3% in 2020: food prices will push up inflation, demand effects will push it down, and the significant volatility of the forint will increase insecurity. As a result of the significant reorganization of the consumer basket due to the crisis, the purchasing power of household incomes may decrease by 4-4.5% measured by actual (current) weights.