The Hungarian economy once again surpassed initial expectations last year, expanding 4.9% on 2018, itself a 5.1% increase on 2017. But the warning signs were flashing before Christmas that such progress was unsustainable, and New Year forecasts for 2020 were in the 3-3.5% range. Then, news began circulating of a new, flu-like virus spreading from China.
Mezzo, an up-market restaurant near Széll Kálmán tér, in Buda, has a good name for food, victuals and service. Yet at lunchtime on the first working day of March, it hosted a mere handful of diners. “It’s all the more surprising since a week ago it was pretty much full,” one commented.
Was this lack of custom an early sign of coronavirus worries, a micro-example of the impending economic fallout from the crisis?
Apparently not, according to Gergely Haris, managing director of the family company that owns Mezzo.
“Demand at weekday lunchtimes has always been fluctuating at Mezzo, there is no real pattern... so I wouldn’t say that the lower custom was due to the coronavirus,” he told the Budapest Business Journal.
However, Haris admitted that another business unit, Haris Park, a historic restaurant and conference venue, also in Buda, had seen two cancellations of events booked for March, and another on hold for April because of virus fears.
“So yes, there is an influence on the hospitality sector, large groups are cancelling not only with us, but with our partners as well,” he said.
At that time, and with no known cases of infection in Hungary, Haris was hopeful that the outbreak could be contained, and that the restaurant sector, at least, would be little affected, even if hotels and larger, international events would “definitely struggle for a few months”.
But just one week later, with nine infections in Hungary, and 115,000 cases globally (at mid-day, March 10), these hopes were looking decidedly optimistic, most especially with airlines announcing cancelled flights on an almost hourly basis.
Under such fast-changing conditions, it is clearly difficult for the most informed expert to forecast the full domestic economic effects of the crisis.
Nigel Rendell, economist with London-based Medley Global Advisors, told the BBJ that the risks to growth were “clearly skewed to the downside” due to both the maturity of the economic cycle in Hungary, along with the impact of the virus on global activity and trade.
He estimates a base-line GDP growth forecast of 3% for both 2020 and 2021. Indeed, Rendell argues this could be “par for the course for the future of Hungary” as European Union funding “is likely to see a significant drop beyond 2021”.
But, he warns, his prognosis “assumes there is some resolution to the coronavirus over the coming weeks”.
Closer to home, Zoltán Török, head of research with Raiffeisen Bank in Budapest, admits “We’re making forecasts, we set up different scenarios, and then two days later, we revise them!”
Ironically, in early January, he was toying with upping his baseline growth forecast from 3.2% to around 3.7%, but just as he was about to publish the revised increase, the coronavirus spread to Europe.
“Our initial reaction was OK, we will not increase, we’ll leave the base case unchanged. That was only last week [early March],” he says.
Török points to tourism, the hospitality sector, transport and logistics and, with imports from China interrupted, electronic manufacturing as sectors already showing significant downturns.
“Tourism is very badly hit. Look around; it’s really dramatic, and we are just at the beginning,” he said. “The virus is not an epidemic yet in Hungary, it’s very sporadic so far, but I’m sure it’s going to change for the worse in the coming weeks and months, so it’s going to be even worse for tourism.”
Fortunately, the auto sector in Hungary uses few Chinese-made parts, so vehicle manufacturing has thus far largely escaped any negative effects of the crisis, but will obviously suffer from the inevitable drop in demand from export markets.
So too, the banking sector is bracing itself for the expected shocks, with companies holding back on investments and households far more cautious in taking out retail loans.
“[I expect] there will be companies going to the brink of bankruptcy, or even going bankrupt, [so] unemployment and non-performing loans increase, and that’s another hit to the bank sector,” Török said.
The sudden economic cooling will have one positive development; inflation, which had been running over target at about 4% at the turn of the year, will be tempered. Török sees this comfortably around the targeted 3% by May, or possibly even April.
But that is scant comfort in an otherwise gloomy economic picture.
Török has already turned last week’s downside forecast of 1.6% growth for the year into this week’s base case.
“I might change that, a little bit upwards, but it’s not going to be above 2%,” he told the BBJ on March 10.
In London, Rendell admits that, given the unknowns, forecasting could soon become guesswork.
“If the [COVID-19] virus is long lasting, for much of the rest of the year, then I don’t think anyone knows just how badly growth forecasts could be slashed, neither for the global economy in general, nor Hungary in particular.”