Economy 9 June 2021, 9:25am

Hungarian economy could grow by over 7% in 2021

Portfolio

After Hungary's Q1 2021 GDP data caused much a surprise to the upside, analysts keep revising their full-year forecasts upwardly. This year, the Hungarian economy could grow by more than 7.0% on annual average, a feat never achieved before. Portfolio has taken a look at the possible growth scenarios to see which of those have the highest and lowest chance of materialising. It turns out that a new growth record in 2021 would be missed only if the worst assumptions came true. The key factor here, of course, is the extremely low base created by the coronavirus pandemic in 2020, but the fact that the economy recovered much faster than expected also plays a key role.

Analysts at Erste Bank project 6.9% annual average GDP growth for Hungary for this year, and economists at ING Bank think growth will reach 7.3%. If their estimates proved correct, Hungary would record its largest ever economic growth in 2021. In light of the fact that output in the first quarter still showed contraction over Q1 2020, these prognoses might appear overly high. At the same time, the coronavirus outbreak led to a shock of shutdowns therefore we are now going to see spectacular year-on-year growth figures one quarter after another.

We've already been aware of this, yet GDP estimates have started to be adjusted upwardly only in over the past few days. The trigger for the changes is that the economy delivered unexpectedly great results in the first quarter, and despite lockdown measures implemented to stem the spread of coronavirus in the second and third waves of the pandemic, output even increased over the fourth quarter of 2020.

This reaffirmed the view that the coronavirus pandemic is a rapidly passing shock, from which the Hungarian economy is recovering in an even briefer period than previously thought. As you can see on the chart below, contraction was sharper than in the 2008 financial crisis, but the rebound was all the more robust. Economic growth is currently constricted by less powerful and less stubborn factors, and some even believe that their fleeting nature is the reason behind mounting inflation risks, hence the faster recovery.

If you think about it, a rapid correction is not such a surprise in view of the aforementioned. Hungary's GDP contracted by 5% last year and a 7% growth in 2021 would translate only into an average growth of 1% over a two-year period, way behind the previous 4 to 5% rate of the preceding period. In the following we show you four potential growth scenarios.

1st scenario: BEARISH - In this we assume that the economy will continue its recovery from the crisis at a decreasing rate, i.e. it will edge closer to its pre-crisis economic performance regardless of the timing of the lockdown measures and their lifting. Before hitting that level, though, the fourth wave in the pandemic brings about contraction again in the fourth quarter. We estimate that real GDP in 2021 could be 5.0 to 5.5% larger than in 2020 even in this scenario.

2nd scenario: CAUTIOUS - A little while ago we would have called this scenario 'middle ground', but it now seems rather cautious. The assumption here is that the Hungarian economy will keep recovering and reach its pre-crisis output level by the end of this year. The constant improvement in the outlook is clearly reflected by the fact that in 2020 economists projected this point to be reached only in 2022, while the consensus estimate was the end of 2021 before the release of Q1 2021 GDP data, and all analysts today think it will happen before that. Therefore this expectation should be regarded as moderate, even though it would translate into annual average growth of around 6% this year.

3rd scenario: BULLISH - Here the assumption is that Hungary will reach its pre-crisis growth level already in the second quarter. For that to happen, the economy needs to be bolstered by the lifting of restrictions, i.e. sectors previously constrained by the lockdown measures would need to become zippy while not causing downturn elsewhere. Statistics show households have accumulated hefty savings during the pandemic (not each one of them but in general) and this pent-up demand is now awaiting to be released. If consumption picks up even more, this year's annual average GDP growth could exceed 7%.

4th scenario: ULTRA-BULLISH - According to the classic crisis theory, a crisis ends not when the economy corrects back to its pre-crisis performance, but when it worked off the downturn so much that it returns to the growth trend of the previous years (see the purple ascending line on the chart above). A bitter lesson learned from many crises is that economies fail to make it (hysteresis) and suffer persistent consequences. This is particularly true for longer crisis periods, but because the coronavirus crisis is not like that, we can come up with an ultra-optimistic scenario in which the economy works off the impacts of the pandemic completely by the end of 2021. In that case, GDP growth would exceed even 8%.

Only the first of the above scenarios would not result in a new GDP growth record, while the other three would result in growth greater than the all-time high expansion of 5.4% in 2018.