A few Hungarian economic data points

Here is the new year, a good time to take a quick look at the Hungarian economic situation. After reading a few recent articles in the Hungarian papers dealing with the economy I am pleased to report that there seem to be some promising developments.

First and foremost, and this is really a surprise, it looks as if the deficit, instead of growing as many expected, actually decreased in the last quarter. The ministry of finance predicted a deficit of 992.4 billion for the year but because of the sluggish economy the government thought tax revenues would be lower than originally projected, leading to a larger deficit. Contrary to all expectations, as the title Népszabadság's article indicates: "No one would have believed it: the deficit is smaller than expected." The paper learned from "reliable sources" that tax revenues in December were 50-60 billion forints more than the ministry hoped for.

Another good piece of news is that the pace of retail store closures has slowed even though holiday sales were not robust. Stores are planning huge January clearance sales; apparently many consumers have waited to buy at discounted prices. According to analysts, however, the retail sector should recover more quickly than other areas of the economy. Their prognosis is based on trends. While in the first half of the year 41% more retail stores closed than in the first half of 2008, in the second half the trend reversed: there were fewer store closures than in the second half of 2008.

Another interesting piece of news is that because, starting on January 1, 2010, the government is using tax breaks to encourage long-term investment in a range of financial products brokerage firms and other financial institutions are preparing for an anticipated onslaught of interested small investors.

As for unemployment, it is high and still rising but the rate of change has slowed. In December, at 10.5%, it was the highest since 1998. The opposition naturally finds every new higher figure an excellent political target. However, Fidesz politicians are apt to talk as if the unemployment rate had nothing to do with the international economic crisis and the government alone were responsible. Yes, unemployment is high, but it didn't spike in response to the crisis the way it did in some other countries. Here is a graph that shows what I'm talking about. 

Unemployment

It is quite clear that unemployment was already high before the crisis hit (8.5%) and therefore the impact of the crisis was a great deal less dramatic than in some other countries. For example, either in the European Union as a whole or, even worse, in the United States where in August 2008 unemployment was around 6% and now stands at 10%.

According to the Hungarian government spokesman the relatively slow rise in unemployment was due to precautions the Gyurcsány and Bajnai governments took. First and foremost, he emphasized, the government initiated a new program called "Road to Work" that employs almost 100,000 people. The government has 97 billion forints to spend on this project in 2009 and in 2010 an additional 110 billion, on top of 7.5 billion from funds provided by the European Union. Moreover, the government spent 7.86 billion in direct aid to help about 50,000 workers remain employed and indirectly helped save another 91,900 jobs. In addition, employers will save about 400 billion forints because the government lowered payroll taxes as of January 1, 2010.

Another reason for the relatively low impact of the economic crisis on Hungarian unemployment is the stream of money coming from the European Union for various projects. Almost every city, town, and village received stimulus money. Hundreds of school buildings are being refurbished, for example. Agricultural subsidies provided by the European Union have never been higher. So, all in all, it could have been much worse.

Admittedly Hungary was saddled with a huge deficit that had to be remedied by an austerity package introduced in the fall of 2006. So the economy was already slowing down before 2008. Gyurcsány's misfortune was that the international economic crisis hit just about the time that his austerity program might have borne its first fruits. He was one of the many victims of the crisis that began on Wall Street.

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Mark
Guest
“No one would have believed it: the deficit is smaller than expected.” Well, we’ll see over the next few months. One, however, ought to be suspicious of this article, for two important reasons. Firstly, the subtitle of the article and some of the content points to the fact that the assertions of the article are not compatible with the published statistics on retail sales – if retail sales are poorer than anticipated it is nigh on impossible that VAT revenues will be higher than anticipated. Secondly, the newspaper does not provide any information as to its sources – “we know that”, and “our sources say” – for all the reader knows the source of the information might be Gordon Bajnai’s cat! However, let us assume that the source is close to the Ministry of Finance. Népszabadság is a pro-government newspaper. The Central Statistical Office which publishes the retail stats is, nominally, independent of government. The Ministry of Finance, by definition, isn’t. So, until we have more evidence – and frankly we are not likely to know for sure whether the government has met its end-of-year budget targets until after the elections now – I would discount any story that attempts… Read more »
NWO
Guest

It seems to me that on a macro level the trends are more positive than some (i.e., the rating agencies) expected. In particular, the internal devaluation strategy derided by many seems to be working to an extent. The move to a massive current account surplus in recent months is proof of that and points the way to a more balanced type growth in the future. Having said that, (1)the human cost of this policy has been very high, (2)the process is not over (there is more suffering to come in 2010), (3) it is very unclear what is the state of the banking sector. Those who seem to be in the know, tell me that the worst is still to come for the banks as non performing loans are increasing and the capital available for lending is decreasing. (4) Finally, of course, the fundamental reforms necessary to move the country forward in the medium and long term are still not even being considered.
The Bajnai Government has done a lot to stabilize the situation, and that is a very good accomplishment for 2009. In 2010, the harder work still has to be undertaken, however.

whoever
Guest

The state of the labor market, and the casualized basis of many jobs, render unemployment figures almost entirely unreliable. Sure they give an indicator of that sort of government expenditure, but little else.
Many of the stats being thrown around in an election year are questionable. But more importantly for politicians, is how people feel. Is there a “feel-good” factor?
Eva might argue that if this is missing, it is Victor Orban’s fault. I would say that this wrong, and Hungary is sliding into a truly depressive political economy at least as a partial effect of the MSZP government’s policies.

Mark
Guest
NWO: ” In particular, the internal devaluation strategy derided by many seems to be working to an extent. The move to a massive current account surplus in recent months is proof of that and points the way to a more balanced type growth in the future.” This is principally where I am unconvinced. The current account surplus is a product of the decline in living standards and the cutting off of credit to household generating a collapse in imports that has outpaced the collapse in exports. It is a kind of shock administered by the removal of external finance, but doesn’t in itself lay the foundations for any future growth. The key to the success of an “internal devaluation” is to reduce labour costs in the competitive, open sector of the economy sufficiently without a downward adjustment in the exchange rate. To an extent Bajnai is seeking to do this through cutting the tax wedge, but looking at the extent to which Hungary’s competitiveness has declined over the past decade this is just not sufficient. You need direct cuts in wages – not in the public sector (these only have an indirect effect by generating the savings necessary to reduce… Read more »
Mark
Guest

NWO: ” Those who seem to be in the know, tell me that the worst is still to come for the banks as non performing loans are increasing and the capital available for lending is decreasing.”
This whole issue is surrounded in a fog generated by an almost complete lack of transparency. But it seems there are two sub-issues. Firstly, we have seen from events and market reactions to the Hypo Alpe Adria rescue that the situation of Austria’s banking sector (which owns much of Hungary’s) is precarious – the question here is how far the attempts of foreign parent banks to consolidate and save themselves from the consequences of lending in CEE depresses the supply of credit in Hungary. I think that Hungarian commentators need to watch events in Austria far more than they have been doing. And secondly, there is the issue of OTP and the situation of its subsidary businesses in Ukraine, Russia, Romania, Serbia etc., and the scale of losses (or otherwise) from their lending.

NWO
Guest
On the Austrian banking front, I am fairly sure the parent banks “instructed” their Hu subsidiaries not to take a too aggressive (realistic) mark on their assets. The banks are not in a position to recapitalize the subsidiaries, and have been playing for time. You can only do this for so long. As the recession (at least on the domestic consumption front) carries on for another year, this will become untenabale (especially on the real estate side). On the internal devaluation, without having looked at the stats, I think Hu has become somewhat more competitive, but not enough. While the merits of trying an internal devaluation versus a traditional devalutation are worth having, as you know, the situation presented to Hun and other CEE countries was almost unique in terms of the household leverage in non local currencies. I still believe an outright substantial devaluation to make Hun competitive (probably between HUG 325-350/Euro) would have destroyed the banking system and bankrupted the household sector even more. Given the choices, I still think the Govt choose well and executed fairly well (at least in 2009), but as I said previously this is only the first step and perhaps (shockingly) the easiest… Read more »
whoever
Guest
“closing hospitals, instituting PPPs, privatising parts of health care delivery and reforming the insurance system and in the welfare and pension areas among others, then Hu can start thinking about becoming really competitive” Please provide evidence and examples that PPPs have actually been cost-effective over the long-term? Because the implementation of these to date would indicate that the long-term costs of PPP in the UK could actually be crippling, and inadequate scrutiny of the small print leaves the operators in a dominant position. Now of course inadequate scrutiny would never happen in Hungary.. it would be clean, and above board, right? NWO seems to have hit on the recipe for a kind of civil war. If anyone’s reading this with the same ideas, please give me plenty of warning before initiating proceedings. NWO – and to a certain extent Eva – seem to exist in a kind of fantasy world of unsubstantiated theory; surely if markets could operate in a “free” way, everything would be OK. The very nature of “free” markets is a fix, but in Hungary, the nature of these markets is a blatent stitch-up. Cultural factors, I guess. Any extension of market forces now, effectively results in… Read more »
Mark
Guest
NWO, I think we can agree that although the GDP slide is slowing, Hungary has some way to go before it is over the worst. If your analysis of the banking sector is correct someone at some point is going to have to rescue it, through either the writing off of bad debt, or recapitalization. Whether this is done by Vienna, Budapest (presumably with the support of an IMF loan), or Brussels, or some combination of the three, this suggests to me that the advantage of “internal”, over “external” devaluation is more apparent than real, and that the preference of banks, the IMF and Brussels has been more about supporting those large banks in their attempts to play for time, at the cost of Hungary’s real economy. It also suggests that this attempt is going to be ultimately unsucessful, though FIDESZ is going to pay the political price. I see Péter Róna in Népszava recently (http://www.nepszava.hu/default.asp?cCenter=OnlineCikk.asp&ArticleID=1279706) has made a parallel point to this about the attempt of policymarkers domestically to give priority to the needs of the financial sector over those of the population. It is fairly clear to me (whether motivated by a “what is good for OTP is… Read more »
Guest

Reading this analysis of things to come I shudder, thinking about my Hungarian neighbours. How are they supposed to cope with that: less wage, less pension, even higher costs for the health system.
I know some of my neighbours have had their phones, cable tv even electricity switched off, cars been repossessed. We lent two friends 50.000 Forints each so this would not happen.
Even now,when you get ill, maybe need an operation, this costs many thousands of HUF in tips to doctors …
Now if the Forint is devalued more, how are people supposed to pay for petrol or other imported goods ?
This doesn’t look good and might mean even more people turn to Jobbik or other extremists in frustration …

Mark
Guest
wolfi: “Reading this analysis of things to come I shudder, thinking about my Hungarian neighbours. How are they supposed to cope with that: less wage, less pension, even higher costs for the health system.” And for the overwhelming majority of those who live from wages and salaries in Hungary this is the most fundamental issue of all, and will continue to be for some time. In fact I am hugely worried about the basic damage that has been done not only to individuals’ health and sense of well being, but also to the broader social fabric, which has been crumbling slowly for a while. However, this decay accelerated at a frightening pace in 2009. Too many of those who profess expertise seem, frankly, close to clueless about the nature of the problems, while their insistent belief that all Hungary had to do was open its economy up to foreign capital and cut back the state in order to become a rich country has been exposed as a confidence trick. A lie far bigger than any of those ever uttered by Gyurcsány. To quasi-paraphrase a speech made by the person most likely to be Hungary’s next Prime Minister back during the… Read more »
whoever
Guest

Mark – Lehet mas a politika ?
http://lehetmas.hu/
Surely this new party has the potential to be the closest to what you are talking about?

Mark
Guest
whoever: ” Lehet mas a politika ?” Their appearance on Hungary’s political stage as a credible force is one of the best pieces of news in 2009. Hungary needs a political party of the democratic left, and you are right, this is the closest. But it is still a young party, and we need to see more of its potential. In the European elections their economic policies were vague, but I’m very encouraged that they have developed a Hungarian version of the Green New Deal with the Compass Institute( http://compasspolicy.hu/img/zold_elenkites.pdf). This is clearly to be welcomed as it does provide the basis for a viable strategy based on job creation and energy conservation – just the things I have long argued a viable stimulus package in Hungary needs to focus on. But, again, in its basic acceptance of the current budgetary framework and its blindness to the tricky set of macro-economic issues (debt, competitiveness, the exchange rate, low growth) as it stands the programme will not deliver the tangible improvements it needs to do to bring people material benefits. Basically it needs to be bolder in its critique of Hungary’s current political economy, and more radical in confronting the issues… Read more »
John T
Guest

This election has come too early for LMP to make an impact – a shame as it would have been good to see an alternative viewpoint on the political landscape. I fear that they will be snuffed out after the election, either through Fidesz controlling the media and stopping their message, or by more physical means if Jobbik make inroads.

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