Economy 14 April 2020, 9:58am

Coronavirus crisis to push Hungary into deep recession in 2020

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Hungary's gross domestic product is to contract by 3.2% year on year in 2020, ING Bank projects. The bank has re-labelled its previous -0.8% estimate as the 'best case' scenario.

"We’re having difficult times in our daily lives. Consumers and businesses need to cope with a new, harsh reality," said Péter Virovácz, senior economist at ING Bank in Budapest, in a research note published on Monday.

The task for analysts is also much harder, he added, as the economic environment is changing on a daily basis. Nevertheless, he has tried to provide an update to ING's GDP outlook for Hungary. Virovácz said that since the bank's last update, which saw GDP contracting by 0.8% year on year in 2020, they have received hard and soft data, anecdotal evidence, monetary and fiscal packages.

He has come up with four scenarios, labelling ING's previous -0.8% forecast as the ‘best-case’ scenario and as his new base case he expects GDP to contract by 3.2% in 2020. He also adds two more scenarios here, the winter lockdown (or ‘worse’) case and the ‘worst’ case forecasts. The former envisages a 3.6% GDP contraction which may not seem much worse than the base case, but in this scenario ING projects 1.7% contraction also for 2021. The 'worst case' scenario pencils in massive 8.5% recession for this year and 1.8% GDP growth for 2021. 200414ing01

Virovácz notes that some might still see ING's base case as overly optimistic. "However, more and more manufacturers have announced that they are getting back to work, opening the gates to restart production from mid-April. The government decided to tighten the restrictions only for Easter, more good news for businesses."

Virovácz, however, does not believe economic policy will provide sufficient support for this scenario to materialise. Whereas the central bank (MNB) introduced various measures - it hiked rates, scrapped targeting of crowded-out liquidity, started a new lending scheme, fine-tuned some of the already existing tools and announced a government security purchase programme - the analyst sees these as "decisive steps to help stabilise the forint, but these might be not enough to support the economy"

According to the headlines, the government's full rescue package (including MNB measures) are worth 16-18% of GDP.

The financial details are still unclear, but it seems that the government is rather just using its built-in reserves, restructures the previous spending and relies on extra one-off revenues, like a ‘bank tax advance’, a retail sector tax and a dividend paid by the MNB.

"Against this backdrop, it is rather a small package in new money, meaning it will hardly provide a safety net for the economy," said virovácz.

Against this backdrop, ING's expectations regarding the 3.2% GDP contraction might prove to be optimistic again, he added. Until we see what March data will bring us and the subsequent update to ING's estimates, here are ING's four scenarios.