Q4 GDP a Pleasant Surprise, Indicates Quicker Recovery


Better-than-expected fourth quarter GDP data suggests a faster recovery; however, a lot still depends on the pace of vaccination and the reopening of the economy.

The gross domestic product of Hungary went down by 3.7% according to raw data and by 4.3% according to seasonally- and calendar-adjusted and reconciled data in the fourth quarter of 2020 compared to the corresponding period of the previous year. Compared to Q3, the economic performance increased by 1.1% according to seasonally- and calendar-adjusted and reconciled data.

The main drivers of the increase were industry as well as the information and communication sector. For the whole year, the economy shrank by 5.1%, strongly contrasting 2019’s 4.6% expansion, Central Statistical Office (KSH) data shows.

The latest data surpassed even the most optimistic analysts’ forecasts and it shows that the recovery potential in the Hungarian economy is much bigger than previously thought. But this year’s re-bounce greatly depends on how long the current restrictions will last, analysts commenting on the data caution.

The 1.1% growth from the previous months in the last quarter of 2020 was a huge surprise, said ING Bank head analyst Péter Virovácz. The main drivers of the growth was industry and exports; however, the question is how the information technology and communications sector was able to balance the setback in the services sector. Also, the construction industry might have added more to the growth than previously expected.

The 1.1% figure was more dynamic than the full year’s average and will have a positive impact on 2021 as well. ING Bank now predicts 4.3% annual GDP growth for this year, supported by positive risk factors; therefore, the growth rate might even reach 5-6%, Virovácz said.

Waiting on Reopening

Gábor Regős, head of macroeconomics at research institute Századvég, said that yearend GDP growth surprised him as well, especially in light of the restrictions introduced in November. The better-than-expected data suggests that the Hungarian economy will get back on track in 2021. Its extent, however, will depend on for how long the current restrictions will be imposed. If reopening starts anytime soon, this year’s GDP growth might exceed 4%, he said.

The Market consensus was for a 5% decline for the last quarter of 2020, therefore the 1.1% growth was a great surprise according to K&H Bank head analyst Dávid Németh. While industry and construction started to recover sooner than previously thought, retail data shows that people became more cautious when it came to consumption; this is mainly due to the loss of jobs as a result of the economic crisis caused by the shutdowns aimed at fighting the pandemic.

Németh thinks that, as many uncertainties are linked to the crisis at the moment, it is hard to predict how quickly the economy will get back on its feet this year. It is still to be seen whether the Hungarian economy will be able to expand in the first three months of this year compared to the fourth quarter of 2020.

That said, due to the low base effect of Q2 2020, the figures are expected to be outstanding in the second quarter of this year. Based on current data, the Hungarian economy is likely to expand by an annual 4.5% in 2021. However, if certain segments can reopen sooner than expected, an expansion above 5% is not impossible, he added.

Takarékbank head analyst Gergely Suppan also thinks it was a huge surprise that the Hungarian economy was able to expand from the previous quarter at the end of the year, therefore the earlier predicted “W”-shaped recovery did not occur.

Although several sectors suffered from the restrictions introduced in November, the extent of the setback was not as significant as earlier. The economy might perform moderately in the first quarter of the year, Suppan thinks, but a gradual livening might commence, in line with the reopening, in the second quarter. Growth might get an impetus in the second half of the year, he said.

Takarékbank analysts expect 6.8% annual GDP growth this year, followed by an expansion to the same extent in 2022.

Growth Potential

In the meantime, international credit rating agency Moody’s Investors Service acknowledged the growth potential of the Hungarian economy. In its country report issued on February 18, it stated that the Hungarian economy was likely to reach its pre-pandemic performance by 2022.

Although the process of strong economic growth and declining public debt has inevitably come to a halt due to the coronavirus crisis, the epidemic has so far had only a limited impact on the basic Hungarian debt profile, according to Moody’s assessment.

It further stated that it expects Hungary’s improvement in budget and debt ratios, which has characterized the past five years, to resume this year.

A few days prior to the Moody’s report, S&P Global Ratings affirmed Hungary’s “BBB” sovereign rating with a stable outlook at a scheduled review. S&P said Hungary’s economic recovery would “gain traction in mid-2021,” with the only major risks to the forecast related to any delay in vaccination rollout and availability of EU funds over the medium-term.

It added that government stimulus and EU monies would aid the economic recovery without incurring external imbalances.

Numbers to Watch in the Coming Weeks

March 1 will see fourth quarter investment data published by the Central Statistical Office (KSH). The next day, KSH will release its second estimate of Q4 GDP data. January retail trade figures will be out on March 4, and January industrial production will come out on the next day.

This article was first published in the Budapest Business Journal print issue of February 26, 2021.

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