Hungary on EU course

The report praised the success of the NBH’s program of growth loans

The Ministry of National Economy evaluated the report published by the European Commission this month as “realistic” and “backing up the economic aspirations of the government”.

Things like this don’t happen every day: the ministry responded positively to the European Competitiveness Report 2014. Because this document considers all measures that help to strengthen the real economy and industry, it is a guarantee of European economic recovery.
In addition, the judgements of the report and the government match when they group Hungary with those countries that start from a relatively modest level but still show good potential for improving competitiveness. The commercial department also remembers the current European high score in terms of growth, which enabled the government to increase its prognosis for growth for 2.3% to 3.1% in the current year.
Together with the budget deficit being kept under 3% of gross domestic product (GDP) and inflation close to zero, we get quite a positive picture overall. Industry is performing in a brilliant way at the moment, especially thanks to vehicle manufacturing.

National Bank growth program praised

The government would like to gradually increase spending on Research and Development to 1.8% of GDP, which would almost double the typical spending on this area in the past years. According to the recently signed partnership agreement with the European Commission, Hungary will spend 60% of the EU funds flowing into the country on development of the economy, which will mean that domestic small and medium enterprises, for example, will receive five times as much chance of securing help with investments as they had in the last governing period.
The report from Brussels also pointed out that besides a spirit of innovation, the reform of vocational training is needed. This was already realised by Budapest years ago, so that the first results of the process put in place are starting to show.
Finally the report praised the success of the National Bank of Hungary’s program of growth loans. It urged all member states generally to focus their economic policies on stronger reindustrialisation and pointed out that energy prices are excessive, just as if the authors of the report had been unorthodox business leaders from Budapest.
The European Competitiveness Report analyses the performance of the manufacturing sector in the European Union, focusing on access to financial resources, international orientation of SMEs, efficiency of public administration and innovation within a business cycle. Energy costs and energy efficiency are especially highlighted because they are of crucial importance for the competitiveness of all kind of companies.
The most important conclusion of the 230-page report is that competitiveness of the manufacturing sector is still intact even after the recession. The decline of added value is primarily explained with the reduced relative prices in the service sector. When relying on reindustrialisation, it should not be supposed that the positive effect will be automatically reflected in a higher added value in manufacturing.

Product innovation is crucial

The smaller and younger enterprises have to suffer because the financial markets are unable to support even those of their projects that promise good revenue. The efficiency of public administration influences the employment and growth of companies, although administration alone cannot be a major driver. Product innovation has much more influence, which can especially unfold in times of high conjuncture, but it can help retain workplaces even in times of recession.
The electricity and gas prices are higher in the European Union than in all the major competing markets, mainly due to increasing taxes, fees and network costs. This disadvantage against international competitors cannot be fully compensated by reducing energy consumption. This is a challenge, even if the share of energy consumption is below 5% of gross production in developed economies.
The report advises that the countries should build upon their strengths in order to emerge successfully from the longest and deepest recession in EU history. The branches of manufacturing industry that have a comparative advantage in the EU are especially pharmaceuticals, chemicals, machinery and systems engineering, and automobiles, so exactly those industrial areas that are well positioned in Hungary.
The domestic share of value added by exports in Europe is at the same level as in the USA and Japan. Regarding the sophistication and complexity of exported goods, the EU belongs even in the absolute top performers. The countries of the Eastern expansion – contrary to the countries joining in 1995 – have added to that significantly. Finally, the manufacturing sector in the EU is supported by a growing number of highly qualified workforces, who perform the hard and often very specialised tasks.

Hungarian industrial share above EU target

The EU set the target for increasing the share of industry in the added value creation back at 20%. In a paradoxical way it is not getting closer to the goal because the productivity gap is widening in other branches of the economy. Hungary is one of those eight countries that already create more than 20% of their revenue from industry.
The Czech Republic and Romania are doing best in this regard with one quarter, followed by Ireland and Hungary, Slovakia and Germany. The bad thing is that the domestic SMEs only constitute a very small part of this, and if we did not consider the investments in the automotive industry and its suppliers, Hungary would be doing even worse than in 2008.
The R&D investments should reach 3% of GDP in the EU by 2020. Hungary is still miles away from this. Although the innovation gap has been slightly reduced since 2008, the Orbán government cannot rely on the SMEs, since only one in eight has something to do with innovation. In terms of qualified workforce Hungary considers itself to be strong, but concerning the availability of skilled workers it received a weak ranking, similar to the Baltic countries and Austria.
Finally, the EU would like to bring gross capital investments up to 23% of GDP – Hungary will finish this year with a bad result of only 16-17%. While loans are hardly available, energy is wasted in an unbelievable way (the situation is not improved by the policy of utility cost cutting) and the political system is more inefficient than in most EU countries. Hungary unfortunately – due to many reasons – is not one of those countries in which the manufacturing sector is doing better today than it did before the outbreak of the world economic crisis.
Which are these countries then? First of all Poland, Slovakia and Romania.