Hungary had to renounce the title of European Growth Champion quite quickly. Still, the government is insisting on three-comma figures; agriculture is to blame for the fact that the results were a bit weaker in the second quarter. Looking at the current results among the drivers of growth we would tend to associate them with a rollercoaster ride than a path of sustainable growth.
Early this month the Central Statistical Office (KSH) published an explanation for the first estimation of Gross Domestic Product (GDP), after which they have presented the quite disappointing 2.7% result for the second quarter of the year. Now we can read in black and white that agriculture is responsible for this recent fall in the conjuncture trend: the top harvest in 2014 resulted in a two-digit jump in growth, while the prospects for this year are much worse due to the weather conditions, so that the contribution of the sector to Hungary’s welfare is expected to rapidly go downhill. (Still, hope remains that the statisticians have been overly cautious – while the harvest data is still being calculated, for the moment they were just relying on large-scale estimations.)
So it looks like agriculture won’t be one of the growth drivers in 2015, unlike the engine of the economy, industry. How is industry doing today? Last year, after finally climbing out from a deep valley, it managed to contribute to the economy with a similar impulse as the service sector, ever so despised by the government.
Re-industrialisation for sustainable jobs
Ever since the decision of the Daimler concern to house a complete automotive factory out on the green in the middle of the Puszta filed in summer 2008, Hungary has a feel of being a bit like an industrial stronghold in the middle of Europe. The Gyurcsány government betted on the wrong number, so the Orbán government has not been taking any chances ever since 2010:
The Prime Minister, who has such a controversial image in the West, announced the course of re-industrialisation, going against the general European trend of becoming a service society. He claims that industry is the most likely to generate sustainable jobs, which is the reason why it is given a prominent place in economic development, because it’s supposed to contribute by creating up to one million jobs.
If Hungary could reach having five million actively employed people, which is about the same as in the Czech Republic, the country would have a sufficient base for sustaining a modern welfare society.
The milestone of four million employees was mainly reached with the help of the numerous public employment programs. This summer KSH calculated even 4.2 million employed people, hitting this number for the first time. This is an absolute top score and it means that the employment rate grew by 10% in the past four and a half years. Or to put it differently, if we compare the present situation with the crisis year 2009, today there are about half a million people in Hungary who are able to earn their living.
With this, Hungary managed to leave the league of the Mediterranean worst performers in terms of labour market statistics, and has reached the target set by Brussels for 2020 regarding the economic activity of men.
The reformed tax policy soaks up this surplus of economic actors, since under the leadership of Viktor Orbán every income is taxed, even the minimum wage. The social security funds are more or less balanced after the “acquisition” of private pension funds and due to the abundantly flowing contributions from more and more employees receiving wages and salaries.
The (globally) top rates of value added tax and excise duties are making sure that the citizens are returning a good deal of their hard-earned money to Father State with each and every consumption.
Exceptional position promised to the partners
The crisis pushed industry in a deep pit. The Orbán government tried to cover the deficit resulting from the crisis with extra taxes; the special taxes imposed over several branches explicitly excluded industry.
In order to restore the undermined confidence of investors, the Prime Minister exchanged the unorthodox economic policy for a system of strategic alliances. About 60 partners (from the industrial and services sectors) joined the economic course of the current government up to today, creating 13,000 jobs and investing several hundred billion forints in the country.
Even if some partners only consider the agreement as a scrap of paper, since its ineffectiveness always surfaces via new ad-hoc measures such as the electronic freight control system (EKÁER) introduced under chaotic circumstances at the beginning of the years, the partnerships are still showing a positive image towards outsiders: Potential investors are getting the impression that if they are on good terms with the Orbán government, they could receive special treatment in Hungary.
The services sector might create valuable (especially better paying) jobs, however it’s still industry that is mainly responsible for ensuring export development. Net exports have been the absolute growth drivers of the years with a better conjuncture ever since the political turn in Hungary.
Last year the total export performance amounted to a proud EUR 84.5 billion and the trade surplus reached EUR 6.3 billion. In the first half of 2015 the amount of exports reached EUR 45 billion again; the dynamics of growth temporarily neared the double-digit range.
More daring analysts forecast a positive top balance amounting to EUR 8 billion for the total year. With this the country is securing the stability of its balance of payments; the dependence on the turbulent international financial markets can be decreased. Should this trend continue for a while, Hungary could realise 100% of its domestic product in the form of exports already in the medium term.
Industry holds the major part of exports and the flagship is clearly the automotive sector with one-third of all exports – which is not surprising, since 93% of their products are explicitly produced for export markets!
Private households work differently
So we know that mainly this sector is responsible for exports but it only produced growth of 3.5% in July. Their contribution to growth was still around 6% in the first semester but its dynamic was about halved from the first to the second quarter.
The current investment amounts also underline that the large-scale capacity expansion projects (primarily in the automotive industry) are over. This is how it could happen that the manufacturing sector, which usually plays a dominant role in the economy, hardly invested more in the second quarter than the logistics and transport branch.
The overall picture of investments looked more optimistic at the middle of the year however; dynamics reached 5.7% (compared to the base of last year). The output values are not as ridiculously low as in the years of the crisis – in 2014 investments grew by a top value of 14% to HUF 5,200 billion on the macroeconomic level.
The Ministry of National Economy recorded an investment quote over 21% just recently and they are hoping that another weak point of the economic policy has just been eliminated.
Finally it’s time for private consumption to catch up. The consequent course of increasing real incomes should be able to strengthen this domestic component of growth. In the past two years growth has been fuelled by public expenditures, but this kind of consumption is not necessarily a guarantee for sustainable development.
However, private households work differently, as the governor of the unorthodox economic policies, György Matolcsy, hoped when he still used to be minister of national economy. On one hand he gave tax benefits to families, on the other he took even more away from the ones earning a low income, and he bled out the “middle class” stuck in the trap of foreign-currency loans with a deliberately low HUF exchange rate.
Since there are abundant possibilities, we can still hope that the economy will be able to grow permanently by 2-3% in the coming years. However, this is not enough to close the gap to the welfare states such as Germany or Austria.
Hungary can only get consolation from the fact that every EU enlargement brings the country closer to the average economic performance – simply because poorer and poorer countries are accepted into the bloc.