Hungary's Economic Outlook Improves Overview The recovery should have continued in Q2, after improving domestic demand and a more upbeat...

Hungary: Economics Improving, Bilateral Tensions Remain




Hungary's Economic Outlook Improves

Overview
The recovery should have continued in Q2, after improving domestic demand and a more upbeat external sector underpinned the economy in Q1. A month-on-month rebound in industrial production in May and significantly higher business confidence in the quarter suggest that private sector activity gained steam. Meanwhile, rising consumer confidence throughout the period, rebounding retail sales and a lower unemployment rate on average in April−May hint at strengthening household spending. Moreover, a significantly expansionary fiscal stance—as confirmed by budget data up to June—likely further supported activity. Meanwhile, in mid-July, the government approved a raft of measures to support credit extensions to small businesses and attract foreign investment. Less positively, the European Commission recently proposed further delaying its verdict on Hungary’s recovery plan amid elevated bilateral tensions. • The economy is poised to bounce back robustly this year. The gradual removal of restrictions domestically and abroad, expansionary fiscal and monetary policies, and sizable inflows of EU funds should rekindle domestic and foreign demand. However, the spread of new Covid-19 variants clouds the outlook. FocusEconomics analysts see GDP growing 6.0% in 2021, which is up 0.1 percentage points from last month’s forecast, and 4.8% in 2022. • Inflation rose to 5.3% in June from 5.2% in May, marking the strongest print since October 2012 and moving further above the upper bound of the Central Bank’s 2.0%–4.0% target range. A low base effect, higher energy prices, recovering activity and loose fiscal and monetary policies will see inflation trend higher this year than in 2020. - Focus Economics


Monetary Policy
At its 27 July meeting, the Monetary Council of the Hungarian National Bank (MNB) decided to raise its base rate to 1.20% from 0.90%, marking the second consecutive increase. Moreover, the Bank hiked the overnight deposit rate, the overnight collateralized lending rate and one-week collateralized lending rate by 30 basis points to 0.25%, 2.15% and 2.15%, respectively. Additionally, the Bank decided to terminate the use of the long-term collateralized lending facility. The MNB’s decision was again aimed at curbing persistent inflationary pressures, re-anchoring inflation expectations and reducing upside risks, amid a robust recovery and buoyant wage growth. Headline inflation rose to 5.3% in June, moving further above the Bank’s target range of 3.0% plus or minus 1.0 percentage point, while core inflation accelerated further to 3.8%. The Bank now expects inflation to remain above its tolerance band until the end of this year, before falling back into that range at the beginning of 2022. On the growth front, the economy seemingly continued to perform strongly in Q2 amid a fast vaccine rollout and the gradual lifting of restrictions. As such, the Bank sees the economy expanding by around 6.0% this year and 5.5% in 2022. Looking ahead, the Bank sees supply disruptions, higher commodity prices and international freight costs, along with recovering activity, as the main upside risks to inflation. Therefore, it outlined that July’s rate increase will be the second of a cycle of hikes designed to “ensure price stability, avoid second-round inflationary effects and to anchor inflation expectations”, which will last until “the outlook for inflation stabilizes around the Central Bank target and inflation risks become evenly balanced”. - Focus Economics



Since Orban won reelection, however, his behavior has called into question not only his democratic bona fides, but also his basic trustworthiness as an ally of the United States and member of the democratic Western world. Increasingly, Hungary is behaving like a rogue state. - Brookings Institute



 

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