OECD Economic Outlook, Volume 2020 Issue 2

Hungary

Following a contraction of 5.7% in 2020, GDP is projected to rebound by about 3% per annum on average in the next two years. New restrictions to contain a second wave of infections this autumn will delay the recovery. As restrictions are lifted, an effective vaccine is deployed, and global trade picks up, domestic and external demand will begin to recover from mid‑2021 onwards. The labour market will improve from mid‑2021 as well, while inflation will continue to be elevated.

Fiscal policy will remain supportive as social security contributions are further reduced. Monetary policy has limited room for further countercyclical action given continued inflationary pressures, which are only partly imported. Phasing out temporary measures to preserve existing businesses in a timely way is needed to enable effective reallocation. In addition to active labour market policies, a longer maximum duration of unemployment benefits (currently limited to three months) would support employment transitions to ensure a stronger recovery.

A second wave has hit the country

The number of new COVID-19 cases has been rising since September. The resurgence of infections led the government to impose new restrictions on 11 November. In consequence, hospitality and recreational facilities will remain closed at least for a month. A travel ban also remains in place. The authorities have stepped up testing and critical care capacity.

Hungary: Labour market and confidence

1. Deviation from the baseline. The baseline is the median value, for the corresponding day of the week, during the 5-week period January 3‑February 6, 2020.

Source: OECD Economic Outlook 108 database; GKI; Refinitiv; and OECD calculations based on Google LLC, Google COVID-19 Community Mobility Reports, https://www.google.com/covid19/mobility /.

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Hungary: Demand, output and prices

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Economic growth remains subdued

Short-term indicators show that the recovery has lost momentum. The rebound in demand slowed during the summer. Consumer confidence fell for a third consecutive month in early autumn. Industrial production bounced back fast after the historic fall in spring, but was still below its pre‑pandemic level in September. Low capacity utilisation is constraining investment. The forint depreciated against the euro in spring, exerting upward pressure on inflation in summer. The unemployment rate declined over the summer before levelling off in September. The OECD’s sectoral estimates suggest that the new confinement measures could lead to a quarterly output loss of just over 1% in the fourth quarter. Unemployment is set to increase due to new restrictions, which have a particularly large negative impact on the tourism and hospitality sectors.

Policy provides substantial relief

A fiscal stimulus package of 7.9% of GDP has provided relief to workers and businesses in 2020, and includes, for example, wage support and cuts to employers’ social security contributions. In November, the government reintroduced wage support for furloughed workers in the most affected sectors. The fiscal expansion amounts to 3.6% of GDP after taking into account revenue‑raising measures and budget reallocations. In 2021 and 2022, additional public investment will be financed partly by the inflow of EU funds, with annual commitments of up to 5.6% of GDP. The central bank reduced its main policy rate from 0.9% in May to 0.6% in July and broadened its bond purchasing programme. Furthermore, to cushion the shock of renewed restrictions, it raised the amount of loans to businesses and for corporate bond purchases by HUF 300 billion, to HUF 1 750 billion (3.8% of GDP).

The recovery is set to regain strength

After a GDP decline of 5.7% in 2020, output is projected to recover in 2021 and 2022. Government spending, including wage support and home‑building subsidies, will cushion the fall in economic activity at the end of 2020 and support growth in 2021. As global trade picks up and restrictions are lifted with the gradual deployment of a vaccine, private consumption and external demand will contribute to growth from 2021. Investment is expected to rebound in the second half of 2021 on the back of stronger inflows of foreign direct investment and EU funds. A deteriorating labour market will be reflected in higher unemployment. Downside risks include prolonged containment restrictions as well as a sharp contraction of the global automotive sector well into 2022, which would hit Hungary hard given the economy’s dependence on the sector. On the upside, a faster‑than‑expected recovery of export markets would improve the growth outlook.

Policy must support the recovery now

Fiscal policy should remain supportive until the recovery is firmly underway. The shift from broad income support towards more targeted measures to preserve jobs in the most affected sectors, notably tourism and hospitality, is welcome. In addition to supporting existing jobs, active labour market policies are a priority to improve labour reallocation for a stronger recovery. Also, the three‑month maximum duration of unemployment benefits is short. Extending it would facilitate job mobility and support employment transitions. The timely withdrawal of emergency state‑backed loans would help efficient reallocation to expanding sectors. Going forward, policies supporting productivity would strengthen the recovery, notably investment in local infrastructure and more competitive product markets.