Economy 24 March 2020, 9:53am

Hungary to slump into recession this year - A view from London

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Capital Economics, a London-based financial-economic analyst group which has one of the largest teams of economists in any private research house, has published its updated estimates for countries in Emerging Europe amidst the spread of the novel coronavirus (COVID-19). The slashed forecasts show that Central and Eastern Europe taken in a wider sense will not be able to avoid recession in 2020.

Capital Economics said a collapse in external demand and supply chain disruptions will weigh heavily on export-oriented sectors. CE now expects the euro-zone economy to contract by around 12.5% q/q in Q2, which be much larger than the 6% peak-to-trough fall in GDP during the global financial crisis. (See here.)

The Central European economies, which are heavily integrated into German manufacturing supply chains are most susceptible, with a number of car plants across the region having already halted operations.

In the current environment, growth in Emerging Europe is forecasted to contract by 2.0% on annual average in 2020, while CE revised its 2021 estimate upwardly to 3.3%.

Hungary's GDP is expected to decrease by 2.0% this year, and grow by 3.8% in 2021.

Capital Economics projects GDP contraction of 4.0% for the Czech Republic, 3.5% for Poland and Slovakia, 1.5% for Romania and Russia, but for 2021 it forecasts growth rates of between 2.0% (Russia) and 5.0% (Romania).

Recession is not a consensus estimates for Hungary, at least in the London-based anayst community.

Bank of America (BofA Global Research), for instance, expects Hungary's annual average growth to be 0.8% this year. It argues that the country's economic structure appears to be more resilient than other economies in the region, considering how susceptible sectors generating gross added value on a national economy level are to the impacts of the epidemic.

BofA Global Research has cut its GDP forecasts again as the global economy is heading to a major recession scenario and shutdowns accelerate across the EU/CEE region. It now sees negative growth in the Czech Rep (-0.5%) and Romania (-0.3%), slightly positive in Poland (0.5%), and Hungary (0.8%), with the Euro area economy contracting by -1.7% in 2020.

Monetary policy responses

In a bid to contain the economic fallout, there has been a swift and large policy response. Interest rates have been lowered in Poland, Czech Republic, Romania and Turkey.

Capital Economics thinks that further loosening lies in store in the Czech Republic and Turkey, assuming the lira continues to hold up. And the latest comments from policymakers suggest that the odds are skewed towards more easing in Poland.

Elsewhere, the Hungarian National Bank (MNB) is likely to refrain from cutting rates this week, but there’s a good chance that it starts purchasing long-dated sovereign bonds and this may be accompanied by a resumption of the MNB’s mortgage bond program.

Financial crisis may ensue

Alongside looser monetary policy, governments have put in place in fiscal stimulus. In general, fiscal support amounts to 2-3% of GDP and, if the economic disruption continues to mount, this will almost certainly be increased.

Policy support reduces the risk that the economic disruption over the coming months morphs into a financial crisis.

This won’t be enough to prevent every economy in the region contracting over this year as a whole, hence the new forecasts.

CAPITAL ECONOMICS CAUTIONED THAT FORECASTING IS EXTREMELY DIFFICULT IN THIS ENVIRONMENT AND THE IMPACT MAY TURN OUT TO BE MUCH WORSE THAN EVEN THEY EXPECT.

"But once the virus is brought under control, we think that looser policy will set the stage for a relatively swift recovery."

Cover photo: MTI/Zoltán Balogh