Fiscal policy does not have much room left to support the economy

HUNGARY - In Brief 09 Jul 2020 by Istvan Racz

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The central government's cash deficit rose to HUF 1837bn or an annualised 8% of GDP in H1 after one of the highest ever monthly deficits, HUF 786bn, was reported for June. Even after adjustment for the EU reimbursement gap, an approach to bring the cash number closer to the accrual-terms ESA-2010 deficit concept and a preferred method of presentation by the Finance Ministry, the 6-months gap reached 6.1% of GDP. This ratio is way above the twice-amended official target of 3.8% of GDP set for this year and is actually very close to our standing annual deficit forecast of 6% of GDP. Should the government take its amended target seriously, which we believe it will be trying to, it will have to refrain from any further generous net spending in the rest of 2020. If the government indeed tries to keep the annual deficit at or at least close to the target, then the result will have to be only slow recovery of demand and output in H2. One advantage though would be a more rapid recovery of the trade balance. In January-April, the merchandise trade balance deteriorated by EUR415m compared to one year ago, but the deterioration was no less than EUR 670m in April alone, according to BOP data. Growing net income from EU transfers saved the BOP from any yoy deterioration as regards the external income balance in the first four months of 2020. But this morning, the KSH reported another EUR 495m of yoy deterioration in the trade balance for May, not least as the massive budget deficit created domestic demand, both directly and indirectly. For H2, we expect substantial correction both in fiscal policy and in the trade balance, simply because the trend reflected by most recent data is n...