New forecast: a lot to change in 2022-2023
The summary of our new forecast for the next two years is as follows: continuing but less lethal Covid, high growth and high inflation fueled by extremely generous election campaign policies this year, a safe Fidesz win in April, forceful fiscal stabilization from H2, followed by moderating growth and inflation in the rest of our forecast period. Access to EU funds will most likely continue to decrease, and foreign relations will become proportionately more difficult. Fidesz’s popularity is also likely to fall after the election. The MNB’s tightening course is set to continue throughout this year, but above-target inflation and high interest rates will most likely stay for 2023 as well.
Regarding Covid, Omicron is taking over from Delta. In recent weeks, this meant the end of the local 4th wave of the epidemic, and a sharp upturn of new cases from the start of this year. However, hospitalizations, ICU occupancy and death cases have remained subdued so far. Going forward, the Omicron wave will likely cause significant but manageable difficulties, with only limited disruption to social and economic life. Risks include the potential appearance of new Covid variants and further global supply bottlenecks if China and possibly others feel forced into further lockdowns.
Growth is set to follow a decelerating trend over the next two years, but it will likely remain quite significant throughout the whole period. Initially, it will be driven by the government’s politically driven fiscal and income policy measures. Fiscal policy is essentially certain to tighten a lot in H2, but the bulk of this effect will be felt only in 2023, and this year’s extremely generous wage arrangements will continue to have an effect for the whole of 2022. The existing global supply problems, which negatively affect domestic industry, are unlikely to disappear for the time being.
The prospective extremely loose fiscal policy in Q1 and the recent reduction of the 2022 deficit target may seem wholly inconsistent, but actually they are not. Neither would it be unusual for Fidesz to make a U-turn in fiscal policy immediately after the election. Fiscal tightening should be facilitated by the cancellation of prestige investments and various set-asides, which have been draining away lots of public funds in recent years. However, major risks are the prospective limitations on the availability of EU funds and the significant likelihood that high global energy prices might make the existing system of fixed energy prices for households rather costly.
Consumer inflation is probably at its cyclical peak currently, but only assuming no further shocks in global commodity prices. However, it is not only high but also sticky, in part because the central bank and the government will continue to work against each other for quite a while from now. As a result, inflationary pressures of domestic origin will most certainly strengthen further this year. Even so, less intense price pressures from the global economy should lead to decreasing inflation, but the headline rate is unlikely to return to the MNB’s tolerance range before end-2023.
It took a few months for the MNB to get up to speed, but by now, central bank policy indeed has become a forcefully tightening one, in terms of both interest rates and quantitative policies. However, the last few weeks have shown that the MNB is not raising the sterilization rate more than needed to keep the nominal EURHUF exchange rate stable or at most marginally appreciating. Even so, we expect further rate hikes until late 2022, but with a much lower speed and frequency than the pace seen over recent months. From Q4 2022, by which time fiscal policy is likely to line up to support the MNB, we see no need for even higher interest rates. But for sure, another unexpected external price shock this year could overwrite this relatively optimistic scenario.
A new issue in foreign relations appears to be Russia’s claim that NATO should retreat from the CEE and its alleged threat of a military strike against Ukraine. This conflict is unlikely to fade away over the next two years. A potential escalation of the conflict represents a global threat, but quite naturally it is likely to hit the CEE more than other regions. Hungary has no good protection against its negative effects, even though it is not a direct target in the conflict, and it maintains friendly relations and a reasonably safe energy supply framework with Russia.
Relations with the EU are set to deteriorate further, as Hungary is moving in a straight line towards serious financial penalties on the grounds of rule-of-law concerns. The latter may be partial, or they could go so far that RRF funds and those funds out of the 2021-2027 EU budget that the government should distribute would never reach Hungary. Our current forecast is based on a mixture of these two scenarios. In this regard, PM Orbán has said that he expects a political compromise with the EU. But how that would be achieved and under what conditions cannot be seen at all yet.
Finally, it seems increasingly clear that Fidesz is likely to win the upcoming parliamentary election in April. This conclusion can be derived from the fact that the united opposition is not even trying to match Fidesz’ ambitious campaign policies by making promises to the electorate. Indeed, the opposition seems to be openly against much of Fidesz’s fiscal and income policy giveaways, and its political program is confined to aggressive anti-corruption activities, fundamentally changing the constitution, and the introduction of the euro within five years. For the average voter, this can be easily translated as political revenge, constitutional chaos, and painful macroeconomic adjustments.
We have a pretty strong impression that the united opposition does not really want to take responsibility for cleaning up the macroeconomic and structural mess left behind by Fidesz for the election winner. A forceful stabilization program if they are in government could quickly erode their popular standing, especially as they should carry out major adjustments in the face of a set of genuinely hostile domestic institutions. Indeed, this could be a recipe for early elections and the victorious comeback by Fidesz quite soon. Instead, the opposition appears to be going for increased parliamentary strength after the otherwise lost election and letting Mr. Orbán’s government damage its name by running into problems with economic stabilization and relations with the EU.
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