OECD: COVID 2nd Wave Would Mean 10% hit to Hungary’s Economy

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The OECD has predicted Hungary’s economy will suffer a contraction of between 8-10% this year, depending on whether there is a second wave of the COVID-19 virus (the so-called “double-hit” scenario), the organization says in its latest Economic Outlook, entitled "World Economy on a Tightrope", published on June 10.

Photo by Dana.S/Shutterstock

In its chapter on Hungary, the OECD report acknowledges the actions taken by the government to try and alleviate the crisis, and makes suggestions for future policy steps, noting that “the pandemic is causing severe economic disruptions due to closures in manufacturing and large parts of the service sector, and an abrupt decline in international trade.”

In both the single- and double-hit scenarios, the OECD predicts a recovery in economic activity in 2021 “bolstered by the release of pent-up demand”, although it notes it would be faster in the former than latter case.  

COVID Contained

The OECD says the COVID-19 outbreak reached Hungary relatively late, with the first cases reported only in early March. “Strict measures have helped to contain the number of new cases […]. The capacity of the health system has been scaled up rapidly. This helped to keep the health crisis under control,” the report says

It notes that the government introduced restrictions in parts of the economy on March 29 to fight the virus. In consequence, large parts of the services sector remained closed in April. Moreover, a large part of manufacturing ceased or slowed production as foreign demand weakened.  

Short-term indicators show that economic activity was already slowing before the shutdown, OECD says. Business and consumer confidence fell to all-time lows in April, before picking-up in May. The number of registered jobseekers rose sharply, by 26.5%, in April compared to the same month in 2019.

Yields on 10-year Hungarian government bonds were very volatile, before stabilizing around 2% in May. The forint depreciated strongly against the euro at the beginning of April, in line with other Central European currencies, and has since then partly recovered.  

“The automotive sector accounts for nearly a third of manufacturing output and was particularly hard hit, with production ceasing as international supply chains were disrupted and demand collapsed,” the OECD finds.

Automotive wasn’t the only important field badly hit, however. “The tourism and supporting sectors, which have a high share of small firms and employ around 10% of the workforce, are heavily affected, notably hotels and hospitality services.”

Prompt Policy  

The report praises the government for reacting “promptly.” Under its emergency law (in place until June 20), the government has introduced measures amounting to HUF 223 billion and announced a HUF 663 bln Epidemic Prevention Fund to step up healthcare capacities.

Indeed, the OECD says the government has put together a fiscal package worth 4.4% of GDP, including wage and investment subsidies, tax deferrals, and cuts to employers’ social security contributions. In addition, a HUF 3.6 trillion moratorium on loan payments offers debt relief until the end of 2020.

“A total of HUF 2.5 tln (5.4% of GDP) in state loans and guarantees were made available to struggling businesses,” OECD says.

At the same time, the National Bank of Hungary (MNB) has launched a HUF 1.3 tln (2.7% of GDP) bond-purchasing program. The MNB also provides more than HUF 1.5 tln (3.2% of GDP) of state loans and guarantees, including HUF 1 tln in the new “Funding for Growth Scheme Go”.

Outlook Uncertain

In the double-hit scenario, GDP will fall by 10% in 2020, with a recovery to 1.5% predicted in 2021, largely based on a projected release of pent-up demand. However, the OECD also warns “as international supply chains will be difficult to restore, the economy will be left with large under-utilized resources by end-2021.”

In the more optimistic single-hit scenario, economic activity is projected to decline by 8% in 2020 but then rapidly grow by 4.6% in 2021.

“A strong rebound is projected for investment, which is supported by higher inflows from European and national funds.”

The difference between the two is wide, which has led some to think the OECD is being too cautious.

“What is interesting is that almost all prognoses are aligned around a Hungarian GDP growth of 4-4.8% for 2021, but there are huge discrepancies (from +3% to -10%) with respect to 2020,” points out PwC Hungary country managing partner Tamás Lőcsei.

“One could think that indeed there are factors outside economics influencing those numbers or there must be many forms of crystal balls. I believe the OECD outlook is too pessimistic on Hungary’s automotive manufacturing hit, speed of reopening and domestic consumption. If you look at their previous outlooks they are traditionally very cautious,” Lőcsei adds.

For both OECD scenarios, the main downside risks are longer lockdown periods and more lasting harm to the economy through unemployment and business closures.

“A sharp contraction of the global automotive sector would hit Hungary hard, given the economy’s dependence on the sector,” the report warns.

“Labor misallocation risks becoming a larger problem as the short unemployment benefit period may encourage jobseekers to take on less qualified jobs.”

Upside risks include a faster-than-expected recovery of international supply chains, which would help restore production faster.

Having praised the speed with which the government reacted to the start of the crisis, the OECD says there should be an equally timely withdrawal of support measures once the recovery starts. “This concerns in particular state loans and guarantees to avoid supporting non-viable firms and ensure the reallocation of resources to the most productive firms.”

To avoid otherwise solvent firms going bankrupt, the OECD says the government should ensure that existing loan schemes are accessible to all firms, in particular capital-weak SMEs.

In addition, policy should gradually shift from temporary measures towards demand support. Notably, the new short-time work (Kurzarbeit) program should include employees without regular contracts, such as “leased” employees or contractors. A longer duration of unemployment benefits is another priority to support incomes and encourage job mobility.

OECD Explainer

The Organization for Economic Cooperation and Development was officially created on September 30, 1961, but its roots go back to the formation of the Organization for European Economic Cooperation (OEEC), established in 1948 to run the U.S.-financed Marshall Plan for the reconstruction war-torn Europe, the OECD website explains.
Canada and the United States joined OEEC members in signing the new OECD Convention on December 14, 1960, giving the body a more global outlook. Other countries soon joined, starting with Japan in 1964. Today, the OECD is a 36-member body working to identify, discuss and analyze problems, and promote policies to solve them.
Brazil, India and the People’s Republic of China, along with Indonesia and South Africa, are so-called Key Partners of the organization, meaning that in total OECD brings together 39 countries that account for 80% of world trade and investment, giving it, the organization says, “a pivotal role in addressing the challenges facing the world economy.”

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