Our first half-year foreign trade data are public, and even summer data are slowly coming to our notice. What thoughts does it provoke in us?
1. The major challenge of the Hungarian economy for the last fifty years was how to grow and catch up to the European level while maintaining external and internal macrobalances, ie being competitive meanwhile. Can we avoid a dramatic decline in our external balance paralell with economic growth? In 1973, 1984, and 2002 we failed, accelerating growth led to indebtedness.
Anticyclically, the balance of foreign trade improved in 1995 and 2009 only because of the need to hold back consumption and investment and thus imports and ,accordingly, economic growth.
2. The situation has been better since 2011, as the external trade balance has improved while we have grown, even with the catching-up of the EU average, even with different opinions on its pace. However, in principle, the two new essential elements of external financing, remittances from abroad and the EU's net transfer, have played a significant role not only in external financing since 2010, but may in principle also provide additional heating for imports. However, until 2016, Hungarian foreign trade surplus continued to grow. In addition to extensive economic policy elements (such as additional domestic labour force inclusion), devaluation policy has also helped in this record.
However, these factors are disappearing as the quality of the labour force reserve decreases and devaluation also generates inflation.
3. The foreign trade surplus has been declining since 2016, thus contributing negatively to economic growth. The reason for this is not the modernization deficit, since there is no significant change in the balance of the machinery products, but the deterioration of the balance of processed and energy products (see oil price increase) and stagnation in the foreign trade surplus of agricultural products is a fact.
The total surplus in trade of goods decreased by more than EUR 1 billion in the first half of this year
and is expected to be slightly higher by the end of the year, ie. well below EUR 5 billion. (In 2016 it culminated in the order of EUR 10 billion).
4. There is nothing to worry about our solvency as surplus of the trade in services - mainly thanks to tourism and road transport - reached € 7.5 billion last year, which is expected for this year as well. But according to the current trends, it has reached its peak. Why would it be a problem if the two branches of foreign trade balance start to fall below EUR 10 billion in aggregate? Because that is what we need to counterbalance the other negatíve components in the current account, that is, the net profit withdrawal. Especially, if the growth of the FDI portfolio has recently declined in Hungary.
5. Of course, there is no reason to panic, even in case of the external balance of payments. We have reserves, mainly through EU transfers, even if the current account balance becomes negative. (Of course, a negative current account indicates that we cannot maintain our actual primary external balance keeping momentum with the actual internal consumption and investement).
Even if we hear about more moderate import growth expectaions indices for the coming momths, improving the external balance also requires increasing economic efficiency and labour productivity, as the Competitiveness Council or the MNB (National Bank of Hungary) calls for it. Our terms of trade ratios (that is, how our export and import price indices -compared to each other -in the world develop) do not improve.
It worsened by 0.4% in 2017 and 1% last year, and is slightly negative this year.
(No consolation, but that of neither of our Visegrád's partners is any better; of course, everyone is a big importer of the more expensive hydrocarbons.) And a balanced budget, which affects the external balance, helps as well.
6. It is now time to start a significant increase in the export of domestically owned firms and capital outflows, as the Prime Minister has recently indicated. To do this, it is not a matter of seeking the favour of the incoming FDI, but of raising domestic processing levels.
7. How do our foreign trade stands geographically?
In spite of the big predictions, our export growth this year was also based on the EU, especially Germany, where Hungarian exports increased by more than 3% even in the first half of the year.
And if there's a problem in Gemany, here is the same. Brexit plays a prominent role in Hungary's foreign trade, as Albion is a prominent player in our trade of goods and especially in the export of services. (Some forecasts indicate a maximum GDP decline of half a percent for us in the short term, in the case of a Brexit without a deal, which may be dampening, but we are already constating a decline in exports.)
What about the BRICS, especially China? As we have no significant direct capital and production chain relationship with them, and China has turned economically inward, their general imports are only increasing by a few percent per year (and Hungary’s exports will fall sharply this year), for a few years we cannot count with them as a breakout point. Export to Russia has also fallen, and that of the US -involved in trade wars -is not expanding, so there is no major import growth trend in our main distant export markets. In this case, the Central European region and the surrounding states associated to the EU remain stable breakourt points.
8. Can there be difficulties in, let us say, two years? Yes, if we do not treat foreign markets in accordance with reality. Money from the EU could generate 2-2.5% of economic growth with a sustained external balance of payments, but hardly more without additional productivity growth. Of course, this is a much more favourable situation than when the external balance of our country was shaken at the historical points indicated at the beginning of this article. Such a menace may not be threatening now.
The writer is professor at Károly Gáspár Református Egyetem