posted in: BTA blog, citadella | 0

headerBg21I have been asked plenty of times recently how long will this boom in the Hungarian economy last. If we take a look at the periods after the regime change, we can see that the economy shows strong fluctuations. I think this will be the case in this cycle as well.

1989-94- Regime change, mega depression

The shift to market economy tends to take a lot of sacrifices. Hundred thousands of people lost their jobs, unable to find another even until this moment. This was the era of fake-disabled-pensioners, spontaneous privatization and free robbery. The economy was in a major collapse, the Hungarian GDP decreased by 16%. The consumption was in a decrease until 1996, by more than 20%, this amount was similar to the effects of the Great Depression (1929-33). The number of employed people declined from 5.2 million to 4.2 million, this is a huge amount. At that time I was in high school, for me this collapse meant only that no one had any money.


The economic stabilization, the turning point, came under the name of “Bokros-package”. At this moment foreign direct investments started to enter the country, new jobs were created, the economic structure has changed, starting from years 1996-97 real wages began to increase. The first phase of this growth was between 2001 and 2002, when the economy was expending on its own. After this the growth was significantly led by borrowings, firstly came the indebtedness of the Government, followed by the population (the majority was foreign currency loan). Between years 1995-2006 net salaries have increased by 54%, retail sales by 68%, and the GDP increased by 51% (reaching its maximum in 2008). In the second phase of this growth, issues were already being seen: the over expenditure of the Government and the population was unsustainable, while the policies which could have helped the success of the structural change in the economy were forgotten.

2006/7/8-2012 Depression (seven years of famine)

For all the sins under the growth in the previous period atonement had to be made. In 2006 government adjustments came under the form of tax increase and deficit decrease. Because of these household consumption started to shrink continuously from year 2006. Retail sales declined by 19%; GDP decreased by 6%. The huge gap between these amounts shows that this period was characterized by the disgust of credits and deleveraging. Both the household and corporate sectors improved the structure of their balance sheet: the tendency to save increased, everyone started to pay back its debts. From 2006 until 2009 real wages have decreased by 6%. This recession should have been ended in 2010, but because of the wrong measures of the Government (in 2011 pointless stimulus, in 2012 constraints), this period was extended by 2 years.

2013-???? Age of EU funds (seven year of great abundance)

After a long and deep recession it is natural that the economy is booming, especially because of the saving and lending position of households and companies, which were improved significantly in the past. This is indicated by the change of current account into a huge surplus. In addition, the state budget got into balance, this way the economy became healthier in many terms. While after the period of year 1995 the economy growth was led by the inflow of foreign direct investments, nowadays the major part of the development is due to the EU funds. The main lesson of the previous growth is that as long as there is an external financing support and latitude in monetary and fiscal policy, until then the growth is sustainable. Although in 2016 there could be a mid-cycle lurch, after that the economy is expected to return to normal, and it will grow as long as money transfers are coming from the EU. Based on these facts the current growth will probably hold until 2020: everything is given for the continuous increase in real wages, consumption and GDP. The highest risk can be considered the shortage in workforce, therefore the appearance of wage – price spiral, so the potential return of inflation. The domestic monetary policy cannot handle this situation until foreign salaries are much higher than wages in the country. The emigration of the workforce can be slowed down or stopped only by increasing the domestic wages, which likely can cause inflation, regardless of the level of interest rates.

By the way, since the trough point in 2012, the GDP increased by 8%, retail sales by 15% and real wages by 10%. The status in the actual cycle is similar to the one of years 1998-98: a boom is starting, but in a balanced way, household consumption is increasing, real estate market is increasing, everything is great and beautiful. However it’s an important difference that everything what is happening right now is due to the EU funds, and in case this source dries up serious problems may occur.

From the viewpoint of asset prices in this cycle real estate market could be the winner, the entrepreneur’s profit is threatened by the wage pressure, profit growth can be difficult.

Original date of Hungarian publication: October 15, 2015