Macro: Economic Update Hungary: Second lockdown, growing damage to health and the economy

Coronavirus: Due to the escalation in the second wave of COVID-19, the Hungarian government has introduced the second, less severe, lockdown. The lockdown has started on 10 November and will last at least 30 days. The lockdown is less severe, since many non-essential shops remain open, but does include a nationwide curfew between 8pm and 5-am.
Growth outlook: After the negative surprise in Q2 when GDP contracted by -14.6% compared to Q1, the recovery that arrived in Q3 was beating expectations as GDP grew by 11.3% qoq. In a yearly comparison GDP was still in the negative territory (-4.7%) though. The economic recovery for the fourth quarter is hampered by the second wave and the second lockdown. However, we believe that the second lockdown is going to result in a less severe recession compared to the first one. Since it seems likely that supply chain disruptions and factory closures wont take place and non-essential shops stay open.
Inflation and rates/monetary policy: Having reached uncomfortably high levels during the summer months, inflation started to decline in the autumn and by October, headline inflation dropped to 3%. At the same time, upon the positive global emerging market sentiment, the forint has strengthened. While in September, the MNB had to tighten, and implement a 15bp implicit rate hike (through the 1-week deposit facility) in order to prevent further massive HUF weakening, only two months passed, and there is a potential (again) implicit rate cut in sight. Meanwhile, the base rate (0.6%) is unlikely to be modified in the next period.
Fiscal Policy: The cumulated budget deficit is already 5.6% of GDP after the first 10 months, and we expect the deficit to jump above 8% of GDP this year, even though new fiscal support to hard hit industries has been rather limited. The debt management agency, in a surprise move, tapped international capital markets. Altogether, the size of issuance was EUR 2.5 bn. In 2020 the total new FX debt reaches nearly EUR 7 bn (over 5% of GDP).

This Research was produced and first published by Raiffeisen Bank International AG which is supervised by the Austrian Financial Market Authority and the National Bank of Austria.