By: Christopher Ball, Ph.D.
22 August 2020
On August 17th, the Hungarian Central Bank (MNB) released a report on the Preliminary financial accounts of General government and Households. “[G]eneral government net lending was equal to -4.9 per cent (HUF -2277 billion) of Hungary’s GDP in the four quarters to 2020 Q2.”
While a near 5% budget deficits is larger than the government targeted, it is not at all unreasonable during the Covid pandemic. Hungary has long struggled with a large debt burden. After finally overcoming their fiscal challenges since around 2010-2011, the government has slowly reduced total debt to GDP and continued on a path of ever lower annual budget deficits. Debt to GDP was around 70 per cent of GDP by the end of 2020 Q2.
Their short term goal is to have a balanced budget and then a small surplus of 1% of GDP in the medium term. While an uptick in the deficit during Covid is a step backward, it is a justified one unlikely to be negatively perceived by markets and should not derail their medium run objectives.
During a time of crisis, household spending falls and savings rises and Hungarian households were no exception. The MNB reports net lending of households was equivalent to 5.8 per cent of annual GDP in 2020 Q2 and 7.9 per cent of quarterly GDP, rising from approximately 4.8 per cent of annual GDP (and near 5.9 per cent of quarterly GDP) at the end of 2019.
The effects of the increased net lending – or savings – on the part of households are many. First, in the short run, increased savings mirrors a decline in aggregate demand and hence slows economic growth. Secondly, higher savings can also represent what is being called “pent up demand” in the economy. This is demand that is being suppressed but will bounce back as soon as normalcy returns or looks near. Finally, if the savings is well allocated, it can be used to reduce household debt and hence support more stable, long run financial positions for Hungarian households, thereby supporting longer-term economic growth post crisis.