Economy: According to the MNB, the start-up wave is approaching now, hundreds of thousands of people could take to the streets

Due to the end of the wage subsidy program and the protracted epidemic, the unemployment rate is expected to rise to 5.2-6.3 percent in the first quarter of 2021, the MNB writes in its forecast in its September inflation report. In the first wave of the epidemic, companies typically did not react with layoffs, but instead made “intensive lateral adjustments,” central bank analyst András Balatoni said at the online event that presented the report. This means that the number of part-time workers and those who are absent (sent on leave) has increased; that can change now.

Higher unemployment, lower real income

Unemployment may begin to decline in mid-2021 and the number of employees may begin to increase at that time. The proportion of people who are left without work could fall below 4 percent by the end of 2022.

When it comes to salaries, salaries in the private sector are expected to rise between 7.8 and 8.5 percent this year, followed by an increase from 6.6 to 7.3 percent in 2021 and from 6.2 to 6.9 percent in 2022.. Based on data from the Central Statistical Office, it may appear that the epidemic had little effect on wage growth. This is explained by the fact that the wage index published by the CSO does not include part-time workers, whose share has increased significantly in recent months. Furthermore, in the changing economic situation, companies have mainly laid off workers with lower wages, which also distorts the official wage index upwards.

When unemployment is expected to peak in early and mid-2021, the number of employees may be more than 100,000 fewer than a year earlier, the MNB believes.

Rising unemployment also means that, although the wages of full-time employees will statistically rise, household disposable income will decline. Real household income may decline by as much as 3.3 percent in 2020, but may increase by 3.9-5 percent in 2021 as a whole.

And household consumption will fall even more than their income, and in 2020, in an uncertain environment, households will form a preventive reserve, thus postponing their consumption and increasing their savings. The central bank expects household consumption to again support economic growth beginning in the second quarter of 2021.

The second wave threw optimism

The drop in household consumption is one of the reasons why the central bank drastically downgraded its forecasts in the previous June Inflation Report. The other two factors are that the epidemic is particularly sensitive to the auto industry and tourism, as well as investment, which have been pillars of economic growth in recent years.

The central bank’s forecasts remained exceptionally optimistic in June, and its forecasts are now similar to the consensus of analysts and Ministries of Finance:

• Inflation around 3.5 percent in 2020 and 2021,
• Recession of around 6 percent in 2020, economic growth of 5 to 6 percent in 2021,
• A decrease in exports of more than 10 percent in 2020 and an increase of 10 percent in the best of 2021,
• In 2020, the general government deficit will be above 7 percent.

The change is explained by the fact that its forecast was revised mainly and fundamentally due to the second wave of the epidemic. According to András Balatoni, after the first wave, the economies of the major export partners and Hungary also started to recover rapidly, but this has stabilized, so a slow and prolonged recovery can now be expected. The economies of the main Western European export partners will not reach the 2019 level by 2022, and international tourism is expected to be perhaps in 2024. Therefore, export demand remains permanently low: goods and services sold to foreign tourists arriving in Hungary are considered exports.

It can be worse if there is no vaccine

But even the above predictions are uncertain because it is not known how the epidemic will unfold and what responses governments, businesses and households will provide. The central bank’s forecast assumes the maintenance of the partial restrictive measures already announced, social distancing, and in the short term they do not expect restrictions similar to the spring regulations that affect most of the economy.

In the medium term, in line with the spread of the epidemic in the fourth quarter, our main foreign trading partners and Hungary are likely to continue to tighten, which may affect external demand and consumption decisions in the longer term.

Additionally, the coronavirus vaccine is expected to be available in the first half of next year, and the epidemic is expected to decline later in 2021, with restrictions gradually easing and social distancing. The comment on the vaccine is important in the Inflation Report, as it says (not surprisingly, of course) that for economic indicators to improve in 2021 and recover greatly in 2022, there will be a large number of vaccines available in the first half of 2021.

Of course, Hungary is doing better

An important question is how much permanent damage the hitherto known effects of the virus will do to farms. The MNB forecast, using a slight polish of self-government and government, states that “as a result of the results of government programs so far and of monetary policy decisions to ease both retail and corporate liquidity,” it cannot be expect the crisis to cause a lasting loss to the national economy.

In other words, they do not anticipate structural damage, which is still an optimistic approach, but it is far from certain that deferred investments by companies do not turn into lagged investments, thus broken economic relationships (including, for example, employment, supplier relationships) can be easily replaced.

The MNB is also optimistic that the Hungarian economy will continue to catch up with the euro area, despite unfavorable conditions; Unlike most previous crisis periods, Hungary’s growth surplus relative to the euro area will continue. The growth surplus of the national economy compared to the euro area will average between 2 and 3 percentage points in 2020 and also in the following years: Western economies will be at least as, if not better, tolerated by the epidemic than Hungary.

Another low point or the guilder exchange rate may still cover the forecast

By the way, the figures presented so far characterize the so-called base scenario of the MNB, but of course they also take into account others, the Monetary Council in charge of setting interest rates highlighted two of them.

“The alternative scenario, assuming a W-shaped recovery from the economic recession caused by the global coronavirus epidemic, points to a slightly lower domestic inflation trajectory than the baseline and a substantially more moderate growth trajectory,” said the inflation report. A W-shaped slowdown means that the slow, flattened recovery we are currently experiencing will turn into a slowdown again, and then farms will rise again from the next low point.

Risk aversion in emerging markets may lead to an increase in the yield of government securities against Hungarian assets (government securities, florins), ie an increase in the cost of financing government debt. Declining demand for the forint weakens the exchange rate (even more) and the weak forint makes imports more expensive, which eventually feeds into domestic consumer prices, driving inflation up. The central bank does not disclose which guilder exchange rate it calculated in its forecasts and regularly emphasizes that it does not have an exchange rate target, only an inflation target, which is 3 percent. Domestic inflation is currently high, still below 4% in the central bank’s tolerance band, and according to the MNB’s benchmark calculations, it will not fall to 3% before 2022, and may even exceed the tolerance band this year .

The exchange rate of the forint against the euro weakened again above 360 ​​before the decision of the Monetary Council on interest rates and the publication of the inflation report, but the evolution did not have a significant effect. Already if the exchange rate did not break and did not weaken above the historical level of 369.5, but did not strengthen below 360.

The Monetary Council did not change the base rate to 0.6%, but two days later, when the inflation report was published, the central bank’s board of directors raised the interest rate offered in the deposit bid to one week from 0, 6% to 0.75%. This is practically equivalent to raising interest rates (banks can deposit their money with the central bank at this interest rate). The forint also strengthened in one fell swoop, from 366 to less than 364. EL Reuters The decision was explained by “preventing the increase in inflationary risks.”