A smaller initial setback is to be followed by a protracted recovery
The real shape of the ongoing economic crisis is increasingly clearly revealed by most recent events and data. These suggest that the initial setback will most likely be deep but somewhat smaller than expected. However, this setback is likely to be followed by a protracted recovery, possibly interrupted by temporary negative events from time to time.
If only everything depended on the domestic trend of Covid-19, prospects would be much brighter than they are. The recent domestic rundown of the epidemic exhibits a steadily improving picture, with the stock number of momentarily infected individuals having fallen to less than half of the peak and all other major indicators showing systematic improvement. Accordingly, economic and social life is gradually returning to normal, and the pre-epidemic order is most likely to be largely restored by the end of summer, just as previously expected.
However, the global Covid-19 picture is much less favorable, which will most probably slow the domestic recovery. Globally, the epidemic has not even peaked and is picking up occasionally even from low levels in various locations. Even in Europe, where the disease is already retreating, there are notable examples of what happens if the authorities remove the lockdown rules too early. Thus, the epidemic is unlikely to be out of the way any time soon, and the main risk is not a second wave but that overcoming the ongoing first wave may prove much more difficult and time-consuming than hoped for previously.
This prospect greatly reduces the chances for an early reopening of all borders, contains the speed of the global economic recovery, and will likely slow down the improvement of consumer and business confidence. Hungary will naturally remain heavily dependent on international trends, given its size and economic openness, the latter including most notably its high exposure to export-driven manufacturing and FX-earning services.
Output data for April has shown mostly a dramatic picture, unsurprisingly as the country, just as largely everyone else in Europe, spent the whole month under lockdown rules. Essentially the whole of tourism and about one third of industrial output was lost for that period. Production in car manufacturing was hit especially hard, having dropped back to one fifth of its previous size. Retail sales looked substantially better, falling by one tenth only, whereas construction output ended up surprisingly unscathed, falling only a little from previous levels. The latter, together with the better-than-expected Q1 actuals, has made us somewhat more optimistic on this year’s GDP.
The government completed another successful euro-denominated bond issue in early June. This means that its extra FX debt issuance has covered the gap between the amended and the original fiscal deficit target already. We still expect the actual deficit to be markedly larger than the amended target, but so far evidence shows that the government has maintained its resistance to any dramatic fiscal overshooting. The draft budget for 2021, delivered to parliament recently, is a genuinely thrifty one, but even the government-friendly Fiscal Council, which is to provide a preliminary opinion on any budget drafts, attached some question marks to the plan’s feasibility.
As compensation for the weak economy, the May data signaled some good news on inflation. The headline rate of CPI-inflation fell further below the medium-term target, due to the short-term swings of fuel prices. But importantly, core inflation also fell markedly, providing central bank policy with more room to help the economy. A further piece of good news, indirectly suggesting that the BOP must be in reasonably good shape, has been the MNB’s success in keeping the EURHUF exchange rate stable at a level favorable from the inflation point of view.
One intriguing question in recent weeks has been if the sudden resignation by MNB Vice Governor Márton Nagy is to bring about any significant change in central bank policy. The best answer we can give at this moment that no such policy change has been seen so far or appears imminent for the near future. From the scant amount of rumors available and from the manner of his replacement, it seems that Mr. Nagy was forced to leave because of his conflicts on the job, the governor’s wish to strengthen control and possibly as a gesture to the banking system, whose cooperation will be badly needed in the implementation of current MNB policies.
Over time, of course, this change in the MNB management will have to have significance, as Mr. Nagy is known as a professional heavyweight and a strong personality, whose departure cannot remain without consequences. But we expect any such consequences to be evolutionary, rather than an immediate material change of policy direction.
In politics, parliament approved a government proposal to end the emergency rule, under which PM Orbán had a mandate to govern the country through government decrees. In practice, this will not change a lot, as (a) the extraordinary measures taken to handle the Covid-19 crisis have been kept in force; (b) parliament, which is taking back the right to issue acts on policies related to the Covid-19 crisis, remains firmly under government control; and (c) the new legislation has laid down the foundations of a “health care crisis situation”, which the government will be authorized to declare, essentially restoring the govern-by-decree rule, as and when needed.
However, Mr. Orbán will be able to use his ending of the emergency rule as a powerful argument over the respect of European values with mainstream political forces within the EU. This can prove very important in the forthcoming months, when an extremely difficult agreement will have to be reached on the next EU budget and the intended European recovery fund. The current odds are that funds will be to an extent directed away from the CEE, towards those parts of Europe that have been hit harder by Covid-19. To improve positions, Mr. Orbán is aiming to get more support within the Visegrád Group; most recently he managed to significantly improve relations with Slovakian PM Igor Matovic.
Domestically, the governing Fidesz has become apparently more popular since the start of the epidemic. We still expect very hard times for Mr. Orbán within the two years left until the 2022 election because of the upcoming economic hardship that had no precedent during his government terms. But for the time being, the majority view appears to be a basic satisfaction with the favorable trend of the epidemic, more than offsetting the dissatisfaction of the many who have lost a lot already in the crisis and feel they are not getting enough support from the government.
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