Lots of good news, yet critical times are coming
The end of summer is approaching, and it is difficult not to see a remarkable sequence of recent good news. GDP continued to grow in Q2; CPI-inflation fell to a ten-year low in July; a massive budget surplus occurred in the first three months after Tisza’s takeover; the forint remains strong, supported by another record high level of international reserves in July; a potential electricity crisis has just been averted despite serious weather-related difficulties around the cooling of Hungary’s only nuclear power plant; and the Constitutional Court rejected a Fidesz motion to reverse the re-nationalization of "public interest trusts", which would have thwarted full compliance with the conditions of the RRF by end-August.
Despite all the foregoing, however, it would be a big mistake to paint a fully positive picture of the domestic macro outlook. The electricity situation is still difficult, requiring energetic government action, both immediately and in the longer term. This year’s growth forecast will likely have to be scaled back in view of an increasingly significant fallout from agricultural output because of the ongoing severe drought in Europe. The time for the government to reveal its fiscal and income policy plans will arrive within a few weeks. Measures to achieve fiscal consolidation and the delivery of Tisza’s election promises will be needed at the same time, a combination that seems to be bordering on the impossible. Meanwhile, the fundamental part of the balance of payments continues its slow deterioration.
Following another small base rate cut in August, which seems almost certain after the excellent July data, easing by the MNB will most certainly slow down greatly again, although one further cut at some point in Q4 may be possible if the strong forint’s disinflationary impact continues to be stronger than expected. The rest will depend mostly on the government’s fiscal plan and external conditions. The EURHUF exchange rate appears to be in just the right place from the Bank’s and the government’s point of view, so that any attempt by it to break out from its current broad trading range in any direction would probably prompt MNB action.
Politically, the relative standing between Tisza and Fidesz remains largely unchanged in opinion polls. The extraordinarily high level of public support that Tisza enjoyed in recent months has started to correct moderately, as various parts of the electorate are getting more impatient for various reasons. But any more significant shift has been prevented by Tisza’s careful avoidance of unpopular measures so far, and possibly by Mr. Orbán’s complete inactivity in domestic politics, combined with Fidesz’s express wish to see and even foster the development of unsustainable economic and political conditions. Meanwhile, Tisza’s parliamentary supermajority elected a new President of the Republic, and two key Fidesz-appointed public officials are set to leave their offices over the next few days.
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