Doom and gloom: OECD forecasts Hungary’s GDP to fall by 8% under “optimistic” scenario
The most pessimistic forecast to date
In its latest publication, the OECD has outlined two scenarios, without labelling either as the baseline or alternate scenario. According to the organisation’s economists,
the most important question in coming months will be whether there is a second outbreak of the coronavirus pandemic.
Even the more optimistic, “single-hit” scenario is much gloomier than the forecasts of the Hungarian government or market experts. In case a second outbreak is avoided, Hungary’s GDP could fall by 8% in 2020 according to the OECD, followed by a 4.6% rebound in 2021. If there is a second wave in the second half of the year, however, GDP could fall by 10% and recovery could also be slower, with 1.5% GDP growth forecast for 2021. (The analysis times the second wave for the end of this year and early 2021.)
This is the most pessimistic forecast so far by any international organisation or market analyst. The European Commission has come closest to the OECD’s figures, forecasting a full percentage point lower recession.
What could tank Hungary’s economy so hard?
According to the OECD, even if a second outbreak is avoided, household consumption in Hungary could decrease by 6.4% this year, followed by a 5% rebound in 2021. In the double-hit scenario, private consumption will decrease by 8.8% this year and only grow 3.8% next year. Household consumption rose in the first quarter with high wage dynamics, so in order for this forecast to come true, consumption would have to decrease dramatically in the next couple of quarters.
Meanwhile, investments could decrease by 15.8% even under the more optimistic scenario, with a slow 3.8% recovery next year, while exports could fall by 6.9% and imports by 5.8% according to the OECD. Should there be a second outbreak, investments are projected to fall 18.3% this year and another 2.6% in 2021, with exports decreasing 8.1% and imports 7%.
Even in the single-hit scenario, unemployment could rise to 6.3% from last year’s 3.4%. In case there are further lockdowns and restrictions, unemployment will be 6.9% this year and could remain above 6% in 2021, the OECD said.
The COVID-19 pandemic is causing severe economic disruptions due to closures in manufacturing and large parts of the service sector, the OECD said in its analysis. Hungary’s economic output could have decreased by more than 25% year on year in April. The automotive sector, which accounts for nearly a third of manufacturing output, was particularly hard hit, with production ceasing as international supply chains were disrupted and demand collapsed. Automotive companies resumed their production at the end of April, albeit at lower capacity levels. The tourism and supporting sectors, which have a high share of small firms and employ around 10% of the workforce, are heavily affected, notably hotels and hospitality services, the OECD said.
As international supply chains will be difficult to restore, the economy will be left with large under-utilised resources by end-2021 according to the OECD. For both scenarios, the main downside risks are longer lockdown periods and more persistent scarring of the economy due to high unemployment and business closures. Upside risks include a faster-than-expected recovery of international supply chains, which would help restoring production faster, the analysis said.
Policy should gradually shift from temporary measures to preserve existing businesses towards demand support and enabling the effective re-allocation of resources once the recovery sets in. In addition to the government’s active labour market policies, an extension of the duration of unemployment benefits is a priority to support the unemployed during their transition to new jobs and to bolster demand during the recovery, the OECD said.
The government reacted promptly to support activity and is implementing a fiscal package of 4.4% of GDP, including wage and investment subsidies, tax deferrals, and cuts to employers’ social security contributions. In addition, a HUF 3,600 billion moratorium on loan payments offers debt relief until the end of 2020. A total of HUF 2,500 bn (5.4% of GDP) in state loans and guarantees were made available to struggling businesses. The central bank launched a HUF 1,300 bn (2.7% of GDP) bond-purchasing programme and also provides over HUF 1,500 bn (3.2% of GDP) of state loans and guarantees.
According to the OECD, policy should ensure a timely withdrawal of support measures once the recovery starts. This concerns in particular state loans and guarantees to avoid supporting non-viable firms and ensure the reallocation of resources to the most productive firms. In addition, policy should gradually shift from temporary measures towards demand support. Notably, the new short-time work programme should include employees without regular contracts, such as leased employees.
A longer duration of unemployment benefits is a priority to support incomes and encourage job mobility.
Deficit, debt could skyrocket
Partly as a result of the much more pessimistic macroeconomic trajectory, the OECD also finds the Hungarian government’s 3.8% deficit target irrealistic, forecasting a 8.8% of GDP deficit this year and 7.7% in 2021 even in the single-hit scenario. In case of a second outbreak, deficit could come close to 10% this year and 9% next year, the analysis said. These are brutally pessimistic forecasts, as even though most analysts agree that the current deficit target is not realistic (as it not only does not allow for economic stimulus spending but could only be met through fiscal tightening), no such high figures have been projected yet.
Higher budget deficit also means higher debt: the more optimistic OECD scenario envisages 76.2% of GDP, to increase further in 2021, ending the falling trend of recent years. In the double-hit scenario, Hungary’s debt could increase from 66.3% of GDP at the end of last year to 77.9% in 2020 and near 82% next year.
Cover photo: Getty Images
