Which will be faster: the virus or vaccination?
The domestic Covid situation now looks very serious indeed. The third wave of the epidemic, which started in the second half of January, has clearly overshadowed the previous second wave in every respect, and it continues to be spreading speedily for the time being. This forced the authorities to tighten lockdown rules in early March. The new Covid regime resembles the restrictions that were in force for six weeks a year ago, and it is hoped they will contain the epidemic within a few weeks. But exactly how quickly and efficiently this will be possible is profoundly uncertain, not least because of the new Covid mutants, which appear to be more vicious than the original Wuhan variant.
Meanwhile, mass vaccination is also forging ahead rapidly. The availability of vaccines does not seem to be an effective constraint anymore, and public preparedness to get inoculated also provides room for speedy progress. Vaccination is being carried out through hospitals and the local GP network in parallel, and despite some initial disorder and setbacks, Hungary has now one of the most deeply inoculated populations in Europe. Even so, the domestic vaccination rate remains too low to contain the third wave immediately, and it is not expected to have a major impact before April. So, at this point, a genuinely fierce race is going on between the virus and the domestic vaccination task force.
The most recent Covid developments are changing our forecast materially, though not fundamentally. There can be little doubt that the economy must shrink through H1 this year, before returning to the path of recovery in H2. In yoy terms, this will have to mean distinctly, rather than moderately, negative GDP growth in Q1, and less-than-spectacular positive growth, on a very weak basis, in Q2. Even accounting for slippages, more than half of the adult population seems likely to have been Covid-vaccinated by June. For sure, this will not mean getting rid of the virus finally and completely, but it should be enough to allow life and the economy to become largely normal again. This should imply a growing economy in H2 and some positive GDP growth for 2021 as a whole as well.
The first macro data on early 2021 was relatively weak, just as one would have expected in view of the second-wave Covid lockdown. This should have a beneficial impact on the BOP: although last year’s terms-of-trade gain will likely be partially or fully reversed on rising oil prices, a major demand-led pick-up of imports is unlikely to happen. The situation is similar for inflation: fuel prices have already started to push up the headline rate of CPI-inflation, but core inflation developments were not at all that bad in the first two months of this year.
In terms of policies, normalization from the Covid-driven extraordinary arrangements is likely to start only when the economy can return to business as usual. Actually, the resetting of policies, both fiscal and monetary, may be even less speedy than that, given the authorities’ likely wish to avoid any disruption ahead of next year’s election. Sustainability does not seem to be a problem in the short term. Rating agencies appear to be keeping decisions on hold, and they are generally positive about Hungary’s short-term prospects. EU funds seem to be secured for this year, even though EU matters are moving in a long-term negative direction from Hungary’s point of view. Financing the government seems to be conveniently feasible, with the MNB’s active participation and the continued interest seen from private investors. The MNB appears to be in a good position to continue balancing between monetary stability and quantitative easing.
EU diplomacy has taken another negative turn as Fidesz was effectively forced to leave the European People’s Party’s parliamentary faction in early March. Immediate consequences are very limited but lacking the EPP’s support may prove painful as and when the implementation of the new fiscal rule-of-law mechanism is raised again. Regarding the latter, Hungary and Poland have just turned to the European Court, asking it to decide if the mechanism is in line with EU law. The Court’s decision may be expected no sooner than midyear, and so Hungary’s right to receive EU funds may be questioned on the basis of rule-of-law issues only late this year, at the earliest.
In domestic politics, the campaign for next year’s parliamentary election has taken an early start on the opposition side, as well. Leading figures are now competing to be elected for the opposition alliance’s candidate for prime minister, a position to be decided at a preliminary vote within a few months. They keep focusing on harsh criticism of Fidesz, carefully avoiding attacks on one another so far. Among other things, the alliance is held together by the fact that according to polls, many supporters would vote for them only as an alliance but not as individual parties. Polls continue to reflect a moderate advantage on the opposition’s side. At present, one thing that looks certain is that the election results are likely to be much closer this time than in any election over the last fifteen years.
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