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Industry Shows Vital Signs but Overall Outlook Worsens

Although August industrial output data is promising, the outlook for the Hungarian economy has deteriorated, according to analysts. It seems that the second wave of the pandemic will surely take its toll on Hungary.

Output of Hungary’s industrial sector fell by an annual 2.1% in August, following an 8.1% drop in July, the Central Statistical Office (KSH) said in its second estimate of data released on October 13. The August figures indicated a move closer to a recovery after falling by around 8% in the previous two months. The scale of those declines was an improvement from double-digit drops in April and May because of a pandemic lockdown.

Working day-adjusted data shows industrial output edged down by 0.2% in August. The KSH said the output of most branches of manufacturing fell in August but the biggest, such as vehicle manufacturing and, “to a lesser degree”, computer, electronics and optical equipment, increased.

In a month-on-month comparison, industrial output rose by 6.8%, based on seasonally and working day-adjusted data. For the period January-August, industrial output fell by an annual 11%.

Analysts say the August output data is promising. According to Péter Virovácz of ING Bank, industrial output could return to the levels of the previous years in the fall, provided that the second wave of the pandemic does not have a major impact on the economy.

Industrial production showed a significant improvement in August compared to the lowest figures reported earlier; however, the question is whether this tendency will last, says Gábor Regős, head of the macroeconomic division at economic thinktank Századvég Gazdaságkutató.

He emphasized it was a good sign that vehicle manufacturing had started to pick up, as it has a significant weight in the industrial production.

Car Making Rebounds

Auto manufacturers in Hungary restarted production in May, third shifts were reinstalled in June and July, and there was no traditional summer break in August, thus production had reached pre-crisis level by that month, Gergely Suppan, head analyst at Takarékbank says.

A second wave of the pandemic, however, would hinder recovery, Suppan warns, adding that he doesn’t expect lockdowns similar to the spring restrictions. Industrial production could shrink by an annual 7% this year, he thinks, but he expects, due to base effects, some 13-14% rise in industrial production in 2021.

Dávid Németh of K&H Bank is quite optimistic: if there are no closures in the industrial sector, production will accelerate from a 11% drop in the first eight months of the year to single digit growth by the end of the year. There surely will be an increase in production next year, he says; however, it is too early for estimations as there are several uncertainties.

In spite of the improving industrial output figures, several analysts and organizations have lowered their growth expectations for Hungary.

Minister of Finance Mihály Varga said at a recent conference that Hungary’s economy would not return to growth levels seen in Q1 2019 until the first half of 2022. He said the second wave of the pandemic would result in a W-shaped recovery, instead of the V-shape many economists had initially hoped for.

Varga emphasized, however, that Hungary’s economy had entered the crisis with strong fundamentals, and stimulus packages had shaved 3-4 percentage points off the contraction.

Worsening Forecasts

In its latest economic forecast, Hungary’s Takarékbank and the International Monetary Fund have both worsened their outlooks for Hungary from previous projections, making it increasingly obvious that the quick, V-shaped recovery once hoped for is a thing of the past and a W-shaped bounce-back is much more likely to occur.

Takarékbank now calculates with a 4.7% setback to growth in 2020, down from its earlier projected 3.2% drop. As for the next year and for 2022, the bank forecasts 7.2% and 4.7% expansion, respectively. In its latest report it says Hungary’s GDP growth might reach 18% in the second quarter of 2021, due to low base effects.

The International Monetary Fund has also released a more pessimistic economic forecast for Hungary, nearly doubling the losses the Hungarian economy could suffer in 2020.

While in its spring forecast, the IMF said Hungary’s GDP could drop by 3.1% this year, it now expects a 6.1% contraction. As for 2021, the spring forecast of a 4.2% expansion has been lowered to 3.9%. These figures are worse than those of the Ministry of Finance and the National Bank of Hungary: the first calculates with a 5.1% shrinkage, while the latter sees a 6% drop in 2020.

The economy of the entire European Union might fell back by 8-9% this year. In an optimistic scenario, expansion might be 5% in 2021, however, there are several downward risks that might have a negative impact. As for the eurozone, GDP might drop by 9-10% in 2020, and grow by 5-6% in the next year.

At for the global economy, the IMF thinks that it will shrink 4.9% this year but could return to its 2019 level in 2021.

Numbers to Watch in the Coming Weeks

The Central Statistical Office will release data on the August performance of the construction sector on October 16. In July, construction output volume had decreased by 21% in one year, although it increased by 3.5% compared to the previous month. On October 29, we’ll find out whether the labor market continued to liven up following a difficult few months due to the pandemic.