April data reflects a much smaller lockdown effect than last year
Most recent Covid news has been just excellent. In spite of the recent slowdown of vaccination, reopening measures have not led to any pickup in the epidemic. On the contrary, Covid figures continue to improve. New variants of the virus have not had any tangible impact so far. The next question will be the effects of the ongoing UEFA Euro 2021 series, which is filling up soccer stadiums with large crowds of people and is leading to a loosening of travel restrictions.
In itself, the April data on industrial output and retail sales was relatively poor compared to performance in March. Yet there were very large increases on a year-on-year basis, strongly suggesting that this year’s spring Covid lockdown had a much smaller negative impact on economic activity than that of last year. Even turnover at hotels was up sharply from last April, although that was measured against an extremely low base, of course.
The labor market continued to improve in May. The number of registered job seekers, net of registered job vacancies, fell quickly. This not only reflected a return to the pre-Covid seasonal pattern but also beat it by a significant margin.
In a slight change from what we wrote in our May report, the existing debt moratorium has been extended with unchanged conditions end-September, rather than end-August. It is still expected to continue from that point until June 2022, but it is not yet clear exactly on what conditions that will happen. Banks appear to be of the view that the general availability of the moratorium should be ended quickly, and the MNB also said that those able to service their debts should urgently start to do so, to avoid an eventual large increase in their total debt service burden.
The central government’s cash balance looked markedly better in May than in the same month of last year, but the cumulative five-month deficit was still bigger than that of January-May 2020. Looking back to the previous six years, the five-month deficit was bigger than this year's only in 2018, unsurprisingly the year of the previous parliamentary election. Election politics have just reached fiscal policy again, as Fidesz is planning to return this year’s income tax to all taxpayers raising children, on a one-time basis, in early 2022.
Net external financing returned to full balance in January-April on a massive recovery in the merchandise trade balance. The financial account showed a large deficit though, which had to do with the government’s financing strategy set for this year. However, international reserves were still up year-on-year and from pre-Covid levels at end-April.
Despite analyst expectations of a further increase, year-on-year CPI-inflation remained at its April peak in May, with the monthly rate of especially non-fuel inflation falling back significantly. We attribute this mainly to the sharp deceleration of forint depreciation vis-à-vis the euro from April. Going forward, upside risks remain significant, but the threat of runaway inflation may be overestimated by the professional audience.
The MNB efficiently talked up the forint, promising the start of a marked tightening trend at the June rate-setting meeting. Its actual delivery met expectations, as both the sterilization rate and the base rate were raised, and the base rate was made the effective sterilization rate again. The start of a new tightening cycle was announced, as the MNB does not expect CPI-inflation to return to below its tolerance ceiling before next year. However, essentially nothing was said about potential cutbacks of quantitative easing. For the next few months, the MNB will likely insist on keeping the forint strong, but it will have to allow a moderate depreciation against the euro from September if it wants to avoid an overly restrictive monetary policy. This requirement should set tight limits for further action on interest rates.
The EU Commission has just indicated that it will come forward soon with its proposed rulebook for the new fiscal rule-of-law mechanism. From its explanation, it seems pretty clear that Hungary’s access to any EU funds is unlikely to be blocked before the election of next April. On other foreign policy issues, Germany’s foreign minister has called to reform the common conduct of foreign policy within the EU, in order to avoid cases like Hungary’s repeated vetoes of common EU initiatives, especially when Russian and Chinese interests are at stake. But this statement appears to be more a part of the German election campaign than a serious reform initiative. The government is apparently aiming to offset the negative impact of such actions by accepting more responsibility within NATO.
Opinion polls still put the united opposition in first place, with no sufficient lead to securely win a majority in the upcoming election. Indeed, Fidesz has gained some strength lately, in parallel with the improvement of the domestic Covid situation. Meanwhile, the opposition’s leading figures are coming forward with their political messages and election promises, campaigning for the opposition preliminaries due in October. The opposition’s recent main topics have been a government plan to build a campus for the Chinese Fudan university in Budapest, and a Fidesz-proposed legal amendment to reduce LGBTQ rights further.
Now read on...
Register to sample a report