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Long-term Plan to Restore Economic Growth

The hoped for “V”-shaped recovery is a thing of the past. The finance minister said at a hearing in the Parliament that it is clear the economy will only recover at a slow pace from the coronavirus pandemic. His ministry is now working on a plan to restore the economy’s growth momentum through financial restructuring covering the next three and a bit years.

The Ministry of Finance is working on a long-term recovery plan for the Hungarian economy, Minister of Finance Mihály Varga announced at his annual hearing before the budgetary committee of the Parliament on October 27. The financial scenario, covering from 2020 until 2023, will outline how the government plans to help the economy return to the fiscal course it ran before the coronavirus hit. 

The plans target economic growth with an emphasis on government debt reduction and maintaining a low budget deficit, the finance minister said. According to him, the virus is likely to cause a rather slow recovery. The ministry has also worsened its GDP growth expectations: while it had projected a 5% annual setback in 2020, it now says the fallback might be as high as 6.4%. 

A turning point of the crisis could come in the second quarter of 2021, as a COVID-19 vaccine may be out by then, Varga said. Following the introduction of an effective vaccine, Hungary’s economy will be able to return to a growth path quickly, the minister added. He also said that the government was able to handle well the damages caused by the coronavirus-induced crisis. 

He detailed how actions have been financed by a fund that was set up to handle the pandemic from an initial amount of HUF 426 billion. In the previous months, HUF 747 bln has been paid by the fund. As for the economic protection fund, the original budget was HUF 942 billion, but HUF 2.059 trillion has been paid out from it so far. 

Higher Deficit

The finance minister now projects that the budget deficit will likely be much higher than in previous years. Ministry calculations show it might reach 8-9% of GDP. Not so long ago, it had expected a 7-9% budget deficit for 2020. 

According to analysts at Hungarian business site portfolio.hu, the fact that the ministry outlines a time span until 2023 suggests that the government does not plan to return to the 1-3% budget deficit any time sooner, which is not surprising, looking at this year’s larger deficit and worsening economic outlook. 

A similar projection was given by Danske Bank A/S recently: The Danish bank said that Hungary’s economy, similarly to that of the Czech Republic, will shrink by around 6% this year, due to the strong second wave of the coronavirus pandemic. 

The fact that the projection is close to that of the Hungarian government means that the bank’s analysts have not become particularly pessimistic in spite of the quick spread of the virus. As for 2021 and 2022, however, Danske Bank puts Hungary’s economic growth at 4%, which would be the lowest among its peers in the region.  

ʼVʼ-shaped no More

The latest forecast by the Ministry of Finance clearly shows that a “V”-shaped recovery is now a thing of the past, although not that long ago it was thought a likely outcome. Back in September, in its quarterly Inflation Report, the National Bank of Hungary (MNB) expected them to contract between 5.1-6.8% this year and annual inflation to be 3.5-3.6%. 

The central bank also said it expected the economy to rebound next year, with predicted growth of between 4.4 and 6.8% and inflation between 3.4 and 3.6%. For 2022, the MNB expects growth to be between 4.5 and 5.7% and inflation to be 3%. The central bank predicted that economic activity will return to pre-crisis level by the beginning of 2022.

In the meantime, the Central Statistical Office (KSH) has released revised data for Hungary’s general government deficit for 2019. The KSH said on October 27 that Hungary’s general government ran a HUF 985 bln deficit last year, equivalent to 2.1% of GDP. 

The deficit was revised up from HUF 958 bln, equivalent to 2% of GDP, in a preliminary reading released in the spring. KSH noted that MNB data shows government sector debt reached HUF 31.078 tln at the end of 2019, equivalent to 65.4% of GDP.

Numbers to Watch in the Coming Weeks

The Central Statistical Office will publish several important data sets in the upcoming two weeks. Yesterday, it was due to release unemployment and employment data for the period between July and September, followed today (Friday) by the earnings statistics for the January-August period the very next day. Also on October 30, the KSH will publish the second estimate of data for external trade in goods for August. September retail trade figures will come out on November 5, together with the number of construction permits issued in the first three-quarters of the year. The next day will show whether the August pick-up in industry continued into September, and also how the tourism sector was doing in the first month of fall. The October consumer price index will be released on November 10.