The annual Growth Report of the MNB is intended to provide a comprehensive view of the development path of the Hungarian economy over a longer time horizon and the key factors determining it. The current analysis focuses on the period elapsed since Hungary’s EU accession, in particular, the domestic and global economic changes since the crisis. Relying on methodological innovations that have appeared in the literature since the crisis of 2008, we have created estimates for the rate of sustainable growth, and use these as our starting point for projections for the potential growth path in the decades ahead.
The current issue of the Growth Report states that the global crisis forced Hungary to modify the growth model it had pursued before the crisis. Debts accumulated before the crisis impeded the recovery of domestic demand persistently; however, the structural factors of growth – the determinants of longer-term growth potential – have exhibited gradual improvement since 2011. Government measures were targeted primarily at increasing labour market activity, which was extremely low in an international comparison. Meanwhile, the new Labour Code may have increased labour market flexibility. Labour market activity increased markedly, while the post-crisis increase in migration represents a new challenge. The adjustment of labour costs may have contributed to the fact that employment returned to its pre-crisis level sooner than output.
The investment rate had declined for years before its reversal in 2013, and it has now become comparable to the levels observed in the Visegrád countries, which have stronger growth potential. The efficiency of capital and labour use continues to be low, in which the duality still characterising the economy may have a defining role.
A faster rate of convergence may be achieved only by way of a further, substantial rise in the rate of investment. The results from our model show that achieving a growth potential of 3.5–4 per cent would only be possible at an investment rate of around 25 per cent. Projecting the rate of investment observed today, the sustainable growth rate of the Hungarian economy may be around 2.5 per cent, which may represent a potential annual convergence rate of approximately 1 per cent. A further, sustained improvement in profitability prospects may facilitate an increase in the investment rate.
According to the analysis, only a permanent change in domestic economic agents’ behaviour may enable the Hungarian economy to break out of the duality of growth and imbalance that characterised Hungary for decades. Since restarting in 2013, convergence has not triggered the kind of deterioration in balance indicators that was observed in the past. Looking forward, the financing required for the growth in the rate of investment is expected primarily from stronger corporate productivity, further reductions in the general government borrowing requirement and reliance on the stable external financing of EU funds and foreign working capital.
Changes in the global environment may continue to determine Hungary’s growth outlook fundamentally. The global economy may continue to grow more moderately following the crisis, whereas the risks surrounding growth may remain strong given the persistent increase in debt levels even after the crisis.
MAGYAR NEMZETI BANK