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Crisis-hit Economy Performed Well Above EU Average

The first macroeconomic data that already shows the effects of the pandemic were released in the past week, and they indeed reflect that the economy came to a halt in the first quarter of the year. However, first quarter GDP data was much less worse than expected, and placed in international comparison, it stands out from the rest of the EU. Worse is yet to come, analysts warn, but the government expects the economy to rebound in the second half of the year.

Minister of Agriculture István Nagy (first row, center) and Minister of Finance Mihály Varga (front row, right) at the plenary session of  Parliament on May 19. Photo by MTI / Zsolt Szigetváry.

Hungary’s GDP grew by an annual 2.2% in Q1, showing a significant slowdown from the previous quarter, the Central Statistical Office (KSH) has said in a first reading of data. Growth was an annual 4.5% in Q4 2019, and 4.9% for the full year.

A year ago, the Hungarian economy was able to expand by a massive 5.3% annually. Calendar year-adjusted data shows GDP grew by 1.8% in the first quarter, while adjusted for seasonal and calendar-year effects, it grew by an annual 2% in Q1, down from 4.4% in Q4.

Compared to the previous quarter, the volume of gross domestic product decreased by 0.4% – according to seasonally and calendar adjusted and reconciled data – in the first quarter of 2020. The engines of the growth were market-based services; industry, albeit to a lesser extent, also contributed to the results, the KSH data show.

As for the latter, in March 2020 the volume of industrial production declined by 5.6% year-on-year, data published by KSH reveals. Based on working-day adjusted data, production fell by 10%. The economic effects caused by the coronavirus epidemic were already significant in this period, KSH said.

Although the March figures have heavily been impacted by the pandemic, industry was still able to contribute to the first quarter GDP growth because of the strong start of the year: industrial production increased 2.4% and 4.1% in January and February on an annual basis, respectively.

Production was 0.1% higher in the first three months of the year than in the same period of the previous year. Industrial output in March, according to seasonally and working-day adjusted indices, was 10.4% below the level of the previous month. The volume of industrial export dropped by 8.1% year-on-year.

Manufacturing Drop

Within industry, production declined by 5.7% in manufacturing, representing the decisive weight of 95%, while it dropped by 27% in the small weight representing mining and quarrying. The output of energy industry (electricity, gas, steam and air-conditioning supply) rose by 5.4%.

In spite of the weak industry data in March, the Hungarian economy still performed better than in most economies in the European Union, the latest data from the EU’s statistical office Eurostat shows.

Hungary’s Minister of Finance Mihály Varga, commenting on the data, emphasized that, although the coronavirus epidemic had fundamentally rewritten economic expectations, Hungary’s 2.2% growth rate had exceeded the European Union average by nearly five percentage points.

He also noted that, prior to the coronavirus outbreak, Hungary was one of the EU’s fastest-growing economies. The government has been pursuing a disciplined fiscal policy and had been ensuring the public debt shrinks, Varga stressed.

The finance minister expects that the data will show the crisis peaked in April; however, he said that the government’s relief package would help the economy to rebound in the second half of the year.

Above Expectation

Analysts agree that the Hungarian economy performed better than expected. According to Takarékbank analyst Gergely Suppan, the better-than-expected performance of the Hungarian economy was due to an outstanding start of the year and the fact that Hungary had introduced fewer strict measures against the epidemic than some other countries.

Péter Virovácz, head analyst at ING Bank, noted that while the strong performance of the first two months was able to counterbalance the weak March data, the upcoming months will see a further decline before a slow recovery starts. ING analysts expect a 3.3% decline in DGP growth this year.

According to Erste Bank analyst Orsolya Nyeste, recession will reach the Hungarian economy in the second quarter, with April being the worst month due to the lockdown and sharply declined demand. However, she stressed that the effects of a slow re-opening will already show at the end of May, which might help the growth. She thinks the recovery process will be slow and maintains Erste’s 4.2% GDP contraction for 2020.

Opinions vary on the possible contraction of the economy and the extent of the rebound: while the government still thinks that after a 3% decline in 2020, the economy will expand by 4.8% in 2021, the European Commission sees a darker future with not less than a 7% contraction this year, although they put next year’s GDP growth at 6%.

Numbers to Watch in the Coming Weeks

KSH will release data on Hungary’s labor market in the February-April period on May 27. Figures will already be compromised by the crisis. The next day, data on investment activity in the first three months of the year will be published. The second estimate of the Q1 GDP data will be out on May 29. On June 4, KSH will publish the state of the retail sector in April, followed by the first estimate of April’s industrial production.