Coronavirus has not crushed the Hungarian economy yet

Portfolio
Hungary's economic output grew slightly in the first quarter of 2020 despite the onset of the global coronavirus (COVID-19) pandemic, but the country will be in recession in the whole of the year, according to economists polled by Portfolio. The Central Statistical Office (KSH) is set to release its first estimate for Q1 GDP growth on Friday morning. There will certainly be recession in the second quarter and the rate of recover depends on how fast coronavirus will be gone and whether there will be a second wave in the epidemic. We also asked the analysts what shape of crisis they expect.
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Hungary's gross domestic product grew by 1.7% year on year in January-March 2020, according to the consensus estimate of analsyts in a Portfolio survey. That would be a major deceleration from 4.5% in Q4 2019. We have to highlight, however, that estimates are spread in a wide range due to uncertainties caused by COVID-19.

"The negative impact of restrictions implemented in relation to coronavirus will be felt in Q1 data but the whole of the economy just dodged recession," commented Ágnes Halász, chief analyst at UniCredit Bank in Budapest.

Recession avoided so far

Gergely Suppan, chief analyst at TakarékBank, highlighted that the year started great in view of data for the first two months, particularly in tourism and catering, and robust growth could have coninued. Although there were disruptions in supply chains in some areas due to the coronavirus outbreak in China, the Hungarian economy was hit hard by local and global restrictive measures only in the second half of March, and so had an impact only on one sixth of the first quarter. 

As restrictions here were a lot less severe than elsewhere a lot of sectors and sub-segments did not even have to be shut down

, said Suppan. As a result of that, Hungary performed much better than other European economies. 

  • Industrial production was flat in annual terms and contracted 2.0% q/q therefore it made no contribution to GDP growth in annual terms, whilt it could have had a negative q/q impact of about 0.4--0.5 percentage points.
  • Retail sales – partly due to panic-buying and mostly because changes in eating habits (working from home, jump in food purchases as a replacement of office canteens) retail sales rose 7.4% yr/yr and 1.7% q/q.
  • he number of guest nights declined by only 18.3% in Q1 thanks to an outstanding 10.8% increase in January-February, Suppan projects.

The services sector came to a halt in mid-March therefore services could have dragged quarterly growth by about a full percentage point, but they could have been up in annual terms, he added. 

2020: recession unavoidable

Hungary is looking at a 3.8% recession in 2020, according to the consensus estimate, but uncertainties are great. Some project only 3.3% GDP contraction while some believes recession will be as deep as almost 10%.

The chart below shows how 2020 GDP estimates deteriorated. Only three months ago the consensus was 3.6% growth while it is now 3.8% contraction. 

Ákos Kuti, Deputy CEO at  Danube Capital R&A Zrt., also highlighted uncertainties relating to the pandemic, forecasting that it will peter out by the second half fo the year, and restrictive measures will be withdrawn. However, he also believes demand and supply shocks will allow only a gradual and slow recovery. 

  • In the baseline scenario GDP will contract by 4.0% yr/yr in 2020, although economic activity will start to grow again in H2.
  • In an alternative scenario assuming more favourable conditions the economy will stagnate, but this would require a fast V-shaped recovery.
  • In an alternative scenario assuming worse conditions GDP will contract by over 8% if the impacts of the coronavirus crisis remain with us longer.

Suppan has also drawn up various scenarios. His baseline is a recession of slightly over 3.0%, a longer recovery phase would lead to a 5% GDP contraction and in case of a new COVID-19 wave recession would reach 6.0% in 2020.  

In the latter case, restrictions could lead to a moderate decline in economic output once again in the fourth quarter and recovery will be W-shaped, he projects. In this scenario, recovery will take a lot longer with additional layoffs and wage cuts. 

Ágnes Halász thinks this year's recession will be as deep as most analysts project only in their worst-case scenarios. She highlighted that small and open economies that rely heavily on manufacturing exports in CEE cannot insulate themselves from external conditions even under a relatively benign epidemiolgical scenario. It is also bad news for Hungary that the crisis hit the economy practicaly at the peak of an economic cycle. 

In her view, the main factors behind the recession is the 20% contraction of exports and investments, the shutting down of external markets, the collapse of global supply chains and delayed/cancelled corporate investments in such an uncertain economic environment. 

She thinks that the rate of recession could be dampened by the HUF 450 billion allocated in the fiscal rescue package only if the state spends this amount immediately on infrastructural projects.

She projects a 5% decline in private consumption this year due to the collapse of certain sectors and the subsequent abrupt disappearance of demand in these, and also because layoffs and rising unemployment will make households think twice before opening their wallets. 

V, W, U, L?

Analysts believe growth in 2021 hinges on the severity of recession this year. Those that project a deeper recession expect a stronger rebound next year. The median GDP growth estimate for 2021 is 4.8%.

For now, Halász trusts the crisis will be V-shaped (baseline), but as time passes the probability of a U-shaped or even a W-shaped crisis grows, especially if coronavirus returns in a second wave. 

Suppan expects a V-shaped crisis with a flatter line upwardly. He projects the economy to hit rock bottom in April with a double-digit contraction but sees a turnaround as soon as Q2. He also believes restart will vary by sector and in some the crisis will be U-shaped or even L-shaped. He mentioned catering, international tourism, large events (festivals, fairs, conferences, concerns, sport events), theaters, cinemas where recovery could  start only next year.  

A second wave in the pandemic could lead to a W-shaped crisis, but he thinks that such drastic measures as those implemented in March will not be necessary (e.g. complete shutdowns). 

Péter Vizovácz, chief analyst at ING Bank, thinks a U-shaped recovery (with its bottom really low and its lines asymmetrical) might be an overly optimistic expectation and the solution could rather be a "drunken J". He noted that you should imagine it as the logo of a famous U.S. sports good maker, referring to Nike. 

Cover photo by Leon Neal/Getty Images

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