An ominous collection of threats: Omicron, microchips, inflation, fiscal policy and the EU
Unlike in previous months, there is some important good news to report on Covid. The local 4th wave of the disease seems to have passed its peak in late November. At present, all leading Covid indicators are improving, essentially thanks to the re-enforcement of face masks and to more effective vaccination policies. However, the first domestic cases of Omicron have just been detected, opening up the door for another vast amount of unknown negative potential.
In comparison with Europe and the US, Hungary’s growth performance from pre-Covid times was mediocre, and it certainly lagged behind the results of most CEE peers. Growth slowed down considerably in relative terms in Q3 2021. A key reason behind this appears to be Hungary’s above-average exposure to the ailing car industry. Details of GDP figures showed that only services grew in Q3. Moreover, the weakness of industry continued in October as well.
An unusually big cash deficit appeared in the central budget in November. The cumulative fiscal gap was still within the annual target but only narrowly lower, and so the repetition of last December’s mega-spending will not be possible this year. Following its November spending spree, the government even reduced its end-year spending targets considerably, which we take as evidence that they are still serious about a small reduction of the annual deficit ratio in 2021.
CPI-inflation rose to a 14-year high in November, on a combination of imported and domestically generated upward pressures. In the forthcoming months, the contribution of energy will most likely abate, but producer price inflation is just too high to allow any significant improvement with regard to consumer prices. The MNB revised its forecast markedly upwards in its new inflation report, making it clear that inflation is not expected to fall close to target by end-2022.
In December, the MNB continued to raise the effective sterilization rate on a weekly basis, with the aim to contain rising inflationary expectations. For the forthcoming months, frequent rate hikes have been promised to continue as far as needed, reducing, and potentially eliminating, the current negative real interest rate. Also in December, the MNB closed down its remaining channels of quantitative easing, including regular purchases of government bonds. Effectively, this amounts to progressive tightening, given the maturity of existing swap and loan contracts. However, forint liquidity in the banking system is still likely to grow initially, because loose fiscal policy will most probably lead to drawdowns from the government’s existing big cash reserves.
Circumstances in European affairs are clearly turning for the worse for PM Orbán. A key unfavorable development has been the new German government recently: its coalition agreement sets forth policies on the EU that are diametrically opposed to the Fidesz government’s intentions. In addition, the European Court has made an important step towards its rule-of-law decision, and the case is moving markedly against Mr. Orbán’s interests. Finally, France is taking over European presidency in the EU in H1 2022, which is also an unfavorable development from Hungary’s point of view.
The election campaign is moving on, with the government announcing additional gifts to voters in the form of higher old-age pensions and wages to various groups of government employees. Compared to the spectacular fiscal policy fireworks, the opposition alliance is not doing visibly particularly much, except for the new PM candidate travelling around the country and introducing publicly the alliance’s candidates for parliamentary constituencies. However, parties remain silent, officially on request by the PM candidate.
This low-profile approach makes it appear as if opposition parties were secretly satisfied with gaining strength in parliament even if Fidesz narrowly won the election, letting PM Orbán to clean up his own mess in macroeconomic policies and foreign relations, or suffer serious losses on popularity because of high inflation and interest rates, the possible loss of much of EU funds and the fiscal stabilisation needed from the middle of 2022.
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