Covid-19 is retreating
The Covid-19 epidemic has been retreating in the inner part of Europe since late April. Hungary joined this trend with about a week’s lag in early May, its stock number of active cases decreasing since then. The official view currently is that the epidemic is coming to its end, but the threat of a reemergence is still present.
Starting in early May, the authorities eased the restrictions imposed on economic and social life in two rounds. The limited curfew was removed, and a gradual restoration of normal operations in trade, catering and other services started. From this week, restaurants all around the country and hotels outside Budapest are allowed to receive guests. However, social distancing rules and a number of other restrictions still remain in place. Borders remain closed except for freight transportation and cross-border commuters, the latter on a relatively small scale at this moment.
The authorities expect a further gradual removal of the remaining restrictions, provided that the improving trend of new infections, mortality and active cases is sustained. The current official thinking is that a limited opening-up of borders may take place before the end of summer, but possibly even before July. However, there is a fair chance that certain Covid-19 measures will remain in force for a significantly longer period.
To us, the removal of most restrictions by end-August appears to be the most likely, as indicated in the forecast published in our April report. Regarding a potential second wave of the epidemic, starting this fall or in early 2021, the risk is significant, but the likely impact should be much smaller than that of the current first round. This is because of the very substantially improved preparedness of governments and the general public, both globally and at the national level.
Regarding the economic impact, the 2% yoy positive growth of GDP reported for Q1 appears excellent compared to the sizable setback seen in the Euro Area. However, it needs to be taken into account that Western Europe took a much earlier hit from the disease, whereas Hungary’s problems came only in a second wave. In the first two months of this year, there was only a deceleration of growth in industry and construction, also reflected by labor market events, as the number of wage-earners fell, and the pace of real wage growth also dropped markedly.
The lockdown rules and their impact started only from late March, drastically changing the mild weakening trend of early 2020. Negative consequences were severe in tourism, transportation, industry, construction, external trade and the property sector. The only exception was retail sales, which was propelled by a massive wave of initial panic buying of basic consumer items. April data will most likely be much worse, as the whole month was hit by the full effect of the lockdown situation.
Labor market consequences are also serious. By mid-May, the number of jobs lost had reached about half of the peak we predicted for the whole crisis. The government is preparing to treat the problem by doubling the size of its social employment programs, in addition to temporarily subsidizing wage payments by a large number of companies.
Major manufacturers in the car industry, which stopped operations completely for a month or so, started to come back to work from late April, and are now operating at 15-40% of their capacities. A similarly slow start is likely to be seen in tourism, catering, retail and other heavily affected services from May, followed by a gradual improvement later in the year. This outlook suggests that our relatively pessimistic forecast last month on GDP and employment does not need to be amended yet. Although we clearly overestimated the initial negative impact on industry and construction, the critical determinants of 2020 GDP growth will be the deep dive in Q2 and the pace of the subsequent recovery.
Following a poor start in Q1, the central government cash budget came out of April quite positively, with a moderate surplus for the month. This was partly seasonal, as April is a month when quarterly tax payments are due, and partly it was a result of incoming EU funds. Regarding policies to fight the crisis, the content of the government’s plan has become much clearer recently, but the overall size of the relatively small package has not been increased significantly.
In its annual convergence report, released in late April, the government amended its 2020 macro forecast, making it more pessimistic and realistic at the same time. However, their main scenario, on the basis of which the 2021 budget is currently being drafted, is still too optimistic in our view. This may lead to a big unplanned financing gap for this year, despite the recent revision of the 2020 financing plan by the ÁKK. Following that revision, the Treasury successfully sold EUR 2bn of long-term bonds at an early stage. The remaining gap will likely be filled mainly by domestic banks’ purchases of debt and by the MNB’s new program to buy government bonds directly.
Over the past month, the MNB did not make any material change in its rather articulate new set of instruments. Instead, it focused on implementation. Crucially, the EURHUF exchange rate has stabilized around 350-355 for now, which is apparently satisfactory for the Bank and somewhat stronger from the forint’s point of view than our forecast for the rest of 2020. The relatively relaxed state of the currency indicates that the BOP has not been hit hard so far and that the tightening carried out on the short end has proven to be sufficient for now.
Should the forint come under pressure for whatever reason in the coming months, the MNB’s new policy toolkit would allow the Bank to tighten further on the short end of the yield curve, without endangering its objective to support the economy through its various loan and bond-purchasing programs. We believe that this kind of separation of monetary control on the short end and the provision of long-term funds to banks, enterprises and the government, with the commitment to sterilizing the resulting liquidity, is a workable and potentially efficient policy approach.
Politics remains a difficult area. EU member states and institutions are putting permanent heavy pressure on the Fidesz government for the recent Authorization Act, which they have found scandalous from the point of view of democracy. Although no direct route is seen to any possible penalty or retaliation, the EU’s continued problems with Fidesz will likely facilitate the diversion of funds away from Hungary in the next medium-term common budget. Covid-19 is pushing events in that direction anyway, because a number of countries in the Mediterranean region and Western Europe have been hit harder than the CEE-region, and so the former will need more help from the EU budget.
Sensing the growing hostility and the increasing chances of losing EU funds, the Fidesz government is now seen backtracking. In recent days, PM Orbán and his cabinet minister hinted that the government may hand power back to parliament by ending the emergency rule at the end of May or in early June. But EU officials and the domestic opposition claim that such a withdrawal may be partial, and a some measures taken during the emergency rule may remain in place. Most importantly, they claim that the funding base of local governments has been significantly weakened, freedom of speech has been narrowed, employee rights have been curtailed and some data protection rules diluted, and cultural sector workers have been excluded from their previous public sector employee status.
At this point, a key trend in the domestic political arena is the fight between the government and the opposition-led local government of Budapest, which is mainly about blaming on each other the relatively high infection rates in nursing homes for the elderly, for which the responsibility of management and supervision is shared. It is impossible to tell how electoral preferences are changing, if at all. One Fidesz-friendly pollster claims that the public is satisfied with the government’s management of the crisis, whereas a left-leaning research firm says that Fidesz has lost some popularity on its inadequate handling of the epidemic and on the related economic hardships.
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