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Economy Doing Well, but Lagging CEE Peers

It seems a good time to be Hungaryʼs economy minister: a casual glance at the ministry website ( reveals a veritable tsunami of positive news.

Releases in early November tell of a booming construction industry, stable public finances, improving national competitiveness rankings positive sentiment from foreign investors and a notch upwards in the country’s ratings by Fitch, the credit ratings agency.

Capping this, preliminary Q3 results reveal Hungary’s economy expanded by 3.8% (calender adjusted) year-on-year – prompting Minister for National Economy Mihály Varga to state: “The domestic economy grew dynamically in the third quarter, which coincided with a steady increase in wages. So employees are increasingly enjoying [the benefits of] economic growth.”

In terms of results at least, Varga can sleep well at night. But in an age when government spin can easily morph into fake news, the neutral observer must ask: is it all true?

The answer is “Yes – but read the footnotes”.

“The major indicators of the economy are relatively good,” Éva Palócz, CEO of Kopint-Tarki, a Budapest economic think tank, told foreign journalists earlier this month.

“The structure, the composition of the growth rate, is much more balanced than previous years…. This year, and maybe next, private consumption and investment will have a positive contribution on growth,” she says.

Dream Interest Rates

In addition, with interest rates at record lows, “corporations can get credit at very, very low interest rates of 2-3-4%. Ten years ago, we couldn’t dream of this.”

So far, so much like government-speak. At this point, however, Palócz departs from the official view. For despite super-low borrowing costs and various credit schemes, small- and medium-sized businesses are generally baulking at the risk.

And behind this reluctance is “unpredictable and non-transparent” government policy, she says, citing a business survey conducted late last year.

“We asked the question: why is your investment so low? We asked 300-400 companies, and it was almost always mentioned: We do not know the future environment for our sector. What will the new regulations say? What about property rights?”

With such concerns, it is little wonder that SME development in Hungary is stunted, Palócz argues.

On the macro-economic level, András Vértes, head of competing economic consultants GKI, recently upped growth forecasts for both this year and 2018 from 3.5% to 3.8%, based on faster than expected investment and increasing consumption – itself a product of wage growth of around 11%.

Everything is Relative

Again, this is in tune with the official song sheet. However, what the government repeatedly ignores – except occasionally, when figures allow it to claim superiority – is that, relative to its peers, Hungary’s performance is, if anything, somewhat below par.

“Yes, we have speedy growth compared to the EU average, but not [within] the region. Compared to the other 11 Central and East European countries, it is nothing special. It is average, maybe a little bit less than the average,” says Vértes.

For comparison, Romania – the star performer of the second quarter with 6.1% growth – produced what one analyst termed “rip-roaring” 8.6% growth in the third, putting it on track for near 7% expansion this year.

From afar, a similar pattern emerges: London-based analyst William Jackson, of Capital Economics puts Hungary’s growth at 4% this year. However, he warns: “This is as good as it gets,” with growth “softening” to 2.8% next year, and inflation rising from 2.5% this year to a worrying 3.8% in 2018.

Intriguingly, Jackson notes that in 2018, growth will “remain faster than potential” - a conclusion that might favour the government line – or not, according to meaning.

“Perhaps we used too much jargon here,” Jackson told the Budapest Business Journal. “Potential growth essentially refers to the underlying rate of growth in the economy, which is determined by how quickly the labour force can rise and how much growth there is in output per worker, or productivity. In Hungary, this ‘potential’ rate of growth is about 2-2.3%,” he said.

Hungary has ‘outperformed’ its natural rate by drawing down European Union funding as fast as possible – boosting its short-term (and pre-election) performance, but risking stability mid-term, he argues.

Indeed, Jackson believes interest rates will need to rise sooner than expected to counter inflationary pressures, or Hungary may face “a nastier inflation shock, and more aggressive rate hikes, further down the road”.

Inflation, of course, is primarily the central bank’s responsibility – so Varga can continue to sleep soundly. But analysis reveals efforts to boost the economy before next year’s elections come at a cost, and Hungary’s economic performance in the current benign global context is not so robust, as he might like it to appear.