Rapid growth, high inflation
This month’s story is about the substantial upside surprises in the latest GDP and inflation reports. These need to be looked at in the light of the upcoming election, as the Fidesz government is aiming to enjoy the positive public mood created by its heavily procyclical fiscal and income policies, whereas it is trying hard to make voters believe that accelerating inflation is a global phenomenon and a kind of a natural disaster, something against which administrative price freezes and handouts of extra income offer proper protection.
Covid, formerly a key variable in macro forecasts, is coming close to falling out of the equation, due to the favorable exchange of Delta for Omicron and an early peaking of the local 5th wave of the pandemic. For sure, a negative turn due to a new variant is always possible, but calculating with currently known factors, Covid is quickly moving towards becoming a manageable endemic disease, with no new restrictions on social and economic life required.
Recent reports on growth have been all pleasant surprises. GDP growth accelerated in Q4, supported by similar shifts in industry, construction, retail sales and even the hotel business. A relatively relaxed Covid regime, heavily procyclical government policies, and a successful diversification in industry, away from car manufacturing, all contributed to this substantially.
Just as expected, the government met its annual fiscal deficit target in 2021, down slightly from the extremely high deficit recorded in the Covid-hit year of 2020. Similarly, the gross government debt ratio also fell moderately, although that was achieved by using up much of cash reserves, leaving the net debt ratio at a higher level than a year ago. Regarding the current year, the government is just in the process of delivering on its election campaign promises, and it is set to keep the fiscal stance heavily expansive until the election in early April. The likely subsequent fiscal stabilization should be greatly helped by stronger-than-expected nominal GDP, we think.
Inflation is really the awful part of the macro story. It is clearly moving away from the MNB’s standing forecast, rising steeply in January rather than moving down sharply as predicted by the Bank in December. Apparently, a pass-through from producer price inflation is taking place, but it is far from being completed. In the forthcoming months, consumer inflation will continue to be fueled by double-digit nominal wage growth and an extremely loose fiscal policy. On this basis, inflation forecasts, official and private alike, will have to be raised substantially for 2022, in our view.
The MNB has continued its distinct tightening course, and as the inflation picture suggests, this policy trend will remain for the rest of this year and also extend into 2023. The Bank has been successful in maintaining a relatively strong forint lately, but keeping it that way will likely require systematic further interest rate hikes in decent monthly steps, as leading central banks are also considering higher interest rates. Growing geopolitical risks and still-rising energy prices will not make the task any easier.
In the ongoing conflict around Ukraine, PM Orbán is trying to balance between Russia and the West, although his western partners tend to think of him more as Mr. Putin’s Trojan horse within the EU and NATO than their true ally. One positive result from Russian orientation is increased energy security, but the risk is also high that Hungary will have to pay for this in the western community one day. Pointing in this direction, the European Court has ruled against Hungary in a much-awaited statement, saying that the EU’s new rule-of-law fiscal mechanism is legal, and so member countries’ access to EU funds can be blocked on its basis. It has been clarified that any such decision can be reached only as a result of a 6-9 months long procedure, but the EU Commission, backed by the court’s decision, is unlikely to release Hungary’s RRF funds until a conclusion is reached on the specific case of Hungary.
The campaign for the early-April parliamentary election is coming into its last phase. Polls suggest that Fidesz has recently taken back the lead from the united opposition, which we find unsurprising in the light of the government’s generous fiscal gifts and its heavy dominance in the local media. The opposition has revealed its main program points, which focus most on re-democratization, the decentralization of power and anti-corruption policies. They still promise remarkably little in direct economic terms, and they deal unexpectedly a lot with where the money required to implement their policies should come from. Another point of interest on the opposition side is to avoid election fraud, with special focus on delegating representatives to all venues where votes will be counted.
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