OECD Economic Outlook, Volume 2020 Issue 1

Hungary

The COVID‑19 pandemic is causing severe economic disruptions due to closures in manufacturing and large parts of the service sector, and an abrupt decline in international trade. Economic activity is projected to fall by 10% in 2020 if there is another virus outbreak later in the year (the double-hit scenario) but should recover in 2021, bolstered by the release of pent-up demand. In the single-hit scenario, where there are no further outbreaks, GDP is expected to fall by 8% and the recovery would be faster.

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 spread of COVID-19 is being contained

The COVID‑19 outbreak reached Hungary relatively late, with the first cases reported only in early March. The propagation of the virus has been slow and strict measures have helped to contain the number of new cases, with fatalities now declining. The capacity of the health system has been scaled up rapidly. This helped to keep the health crisis under control.

Hungary: Two scenarios of real GDP and short term indicators

1. The headline PMI is a number from 0 to 100. A PMI above 50 represents an expansion when compared with the previous month. A PMI reading under 50 represents a contraction, and a reading at 50 indicates no change.

Source: OECD Economic Outlook 107 database; OECD Main Economic Indicators database; GKI; and Refinitiv.

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Hungary: Demand, output and prices (double-hit scenario)

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The government introduced restrictions in parts of the economy on 29 March to fight the virus. In consequence, large parts of the services sector remained closed in April. Moreover, a large part of manufacturing ceased or slowed production as foreign demand weakened. An emergency law that will be in place until 20 June enables the government to rule by decree to address the crisis. The government introduced measures amounting to HUF 223 billion to address the crisis and announced a HUF 663 billion Epidemic Prevention Fund to step up health care capacities. It eased restrictions on 4 May, starting with a gradual opening of non‑essential retail stores, restaurants and the tourism sector.

The economy has been hard hit

Short‑term indicators show that economic activity was already slowing before the shutdown. Business and consumer confidence have fallen to all-time lows in April, before picking-up in May as restrictions were eased. The number of registered jobseekers rose sharply, by 26.5%, in April compared to the same month in 2019. Yields on 10-year Hungarian government bonds were very volatile in March and April, before stabilising around 2% in May. The forint depreciated strongly against the euro at the beginning of April, in line with other Central European currencies, and has since then partly recovered. OECD benchmark sectoral estimates suggest an initial output loss of more than a quarter in April. The automotive sector accounts for nearly a third of manufacturing output and 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.

Hungary: Demand, output and prices (single-hit scenario)

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Policy reacted promptly to support activity

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 3 600 HUF billion moratorium on loan payments offers debt relief until the end of 2020. A total of HUF 2 500 billion (5.4% of GDP) in state loans and guarantees were made available to struggling businesses. The central bank launched a HUF 1 300 billion (2.7% of GDP) bond‑purchasing programme. It has left policy rates unchanged at 0.9%, while expanding the monetary policy tool set by introducing a new deposit tender with an interest rate of 0.9% compared with -0.05% for overnight deposits to stem the depreciation of the forint. The central bank also provides over HUF 1 500 billion (3.2% of GDP) of state loans and guarantees, including HUF 1 000 billion in the new “Funding for Growth Scheme Go”. Fiscal measures to support wages of furloughed workers will curb unemployment.

Growth is set to recover but the outlook remains uncertain

In the double-hit scenario, GDP will fall by 10% in 2020. GDP growth is expected to recover to 1.5% in 2021, reflecting a projected release of pent-up demand as restrictions are eased. As international supply chains will be difficult to restore, the economy will be left with large under-utilised resources by end‑2021. In the single‑hit scenario, economic activity is projected to decline by 8% in 2020 and then increase by 4.6% in 2021. A strong rebound is projected for investment which is supported by higher inflows from European and national funds. 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. A sharp contraction of the global automotive sector would hit Hungary hard, given the economy’s dependence on the sector. Labour misallocation risks becoming a larger problem as the short unemployment benefit period may encourage jobseekers to take on less qualified jobs. Hungary benefits significantly from European Union funds, but a concern is whether these funds can be activated sufficiently quickly for investment. Upside risks include a faster‑than‑expected recovery of international supply chains, which would help restoring production faster.

Additional policy efforts are needed to sustain the recovery

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. Key to improved reallocation will also be a faster dispute resolution system that supports corporate restructuring. To avoid otherwise solvent firms going bankrupt, the government should ensure that existing loan schemes are accessible to all firms, in particular capital‑weak SMEs. 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.