On the way to the historical triple? - should we be “wet weather drivers” instead of lap record holders?

English2019. szept. 12.Barnabás Virág

The year 2019 brought a strong start for the Hungarian economy. Despite deteriorating European conditions, our key economic indicators continue to show a dynamic growth, while several large credit rating agencies upgraded our credit rating.

In addition, the Hungarian economic policy announced serious long-term strategic steps. The seven-point family protection action plan, the export and capital export strategy, the Magyar Nemzeti Bank’s 330-point competitiveness programme and the Bond Funding for Growth Scheme launched in July are all aimed at the strengthening of the sustainable convergence of the Hungarian economy.

The Hungarian economy has been on the convergence track since 2013. In its length, the seven-year-old positive economic cycle is now close to the longest domestic growth periods of the past century, and in its balance indicators, it is definitely unique. This is our first period when the recovery of the real economy takes place while maintaining macroeconomic balance.

All the successful convergence processes in the past century took place in Europe or Asia. A common phenomenon is that the points of comparison were the more advanced neighbouring countries in the majority of cases. This was Sweden for the Finnish, the United Kingdom for the Irish, Germany for Austria, or Japan for South-Korea.

Similarly, for Hungary, the long-term objective is to approach Austria in terms of its development. It is no coincidence that the Magyar Nemzeti Bank’s latest Competitiveness Report also set this objective as a vision to be achieved in addition to a successful turnaround in competitiveness.

Economic recovery is not an automatic process. Out of ten countries making an effort at best one is successful, while the periods of catching up are at least 20, but usually 25-30 years.

At this point, it is worth taking a little detour and enter the world of numbers, so that we can comprehend the nature of the challenge. According to the latest data from 2018, Hungarian GDP was EUR 132 billion, which is only slightly over one third of Austria’s GDP. Obviously, the higher Austrian nominal GDP partly reflects the higher prices in Austria. Average prices (considering all goods and services produced) are approximately twice as high in Austria as in Hungary.

With this adjustment, the result is a GDP per capita at purchasing power parity showing the differences in the level of development much clearly. This shows that currently the level of development in Hungary is 55 per cent of that of Austria. This is the difference we should reduce in the forthcoming decades.

Infographic: The Hungarian and the Austrian economy in numbers

One might ask, how are we going to produce the next domestic GDP of EUR 130 billion, and the one after that? This will require an improvement in the demographic processes and an increase in the added value per capita, i.e. productivity, too, as well as the convergence of prices. The latter is, in part, an automatic process, but over the long term it is important to make sure that it is linked closely to the second factor, i.e. the increase in productivity. In other words, price convergence represents a higher quality of products and services, more modern supporting technology and better expertise.

Since 2013, Hungarian GDP has risen by 3.5 per cent on average, while the Austrian GDP has increased by 1.6 per cent.

This way, we reached an annual growth surplus of 2 percentage points. Taking account of the different trends in the number of the population, our surplus measured in GDP growth per capita was close to 3 percentage points. Starting from a very low value, the Hungarian economy has managed to reach a proper cruising speed since 2013.

The good news is that the speed of our convergence may increase further in the forthcoming years, and as to the GDP per capita, even a surplus of 3-4 per cent per year could be reached, which would allow us to reach 80-85 per cent of the Austrian level until 2030.

However, in order to maintain it over the long term, it is necessary to mobilize the growth reserves in the economy and to continuously take steps to improve our competitiveness. According to our analyses, we still have lots of reserves:

  • The key to higher capital intensity is higher productivity. In 2018, the Hungarian economy produced the second highest investment ratio in Europe, and it is expected to rise even further in the forthcoming years, exceeding 27 per cent (in the ratio of the GDP).
  • The high investment ratio was facilitated by the continuous deepening of the loan market. Despite the turnaround in lending, which took place in the past few years, domestic banks' penetration in lending continues to be weak, half of the average in the Visegrád Countries and one fourth of the Austrian value. According to the forecasts, a robust growth in lending (especially to the corporate sector) will be maintained, therefore loan markets may be important pillars of the convergence process in the future, as well.
  • As a new funding branch, the importance of capital markets is increasing. The renewal of the BÉT (Budapest Stock Exchange) has been happening for years, and in mid-2019, the Magyar Nemzeti Bank started the development of the corporate capital market, too. With the Bond Funding for Growth Scheme, domestic large companies may receive new funds of HUF 300 billion to finance their development and growth.
  • Wage convergence It is generally accepted that the strong growth of domestic wages will continue for a long period, giving further impetus to consumption and increasing household savings. Obviously, over the long term, it is of key importance to make sure that the fast increase in wages is followed by an improvement in productivity, too.
  • In our world, new technologies spread rapidly. The adoption and wide-spread application of digital technologies, robotics and artificial intelligence will provide fast-responding companies and economies with exponentially higher benefits. In addition to funding, another key pillar of the process is R&D and proper education.
  • The ongoing whitening of the economy also brings actual growth potentials. The suppression of the black economy helps fair competition, which is essential for development, and on the other hand, it generates significant additional revenues for the budget every year, which can be used to improve the level and the efficiency of state services.
  • The achievement of an efficient company size would mean a significant progress and increased productivity in the Hungarian economy, which has been operating for decades with too small companies.

Looking at this short list and the deteriorating outlook for growth in the euro area, we can say that we have every opportunity to continue our convergence process started in 2013. However, we cannot emphasize enough that economic recovery is a long-term process.

If we compare it to sports, the situation is similar to the Formula 1 races. In sunny and bright weather, lots of drivers are able to complete very fast laps, but at the end of the season, it is usually the “wet weather drivers” that win the championship. Competitors who are able to beat everybody even in slippery conditions and in curves ... A close example is Poland's performance in the last crisis, as the speed gained in a curve lasts long with a deliberate economic policy.