Economy 6 September 2019, 9:57am

Hungary needs a new stimulus package, central bank chief says

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"I should be painting a bright and optimistic future but many things are changing in the world," György Matolcsy, head of the National Bank of Hungary (MNB), said at the 57th Itinerant Conference of Economists held in Nyíregyháza. Those who fail to see climate change should put on bigger glasses, he said in his keynote speech, titled "Staying ahead on dangerous waters", adding that the economic climate is also changing. Hungary has been performing well for seven years and was on a converging course, but the big question is whether this will be enough during the upcoming economic climate change, Matolcsy said.

Our job is to stay ahead even on these dangerous waters, Matolcsy said, adding that the world is changing and we need to do more than before. It is rare that a country can successfully converge for seven years, but Hungary has done so since 2013. "When the storm is coming, some build walls, while others build windmills," Matolcsy said, adding that the energy of the storm must be harnessed for our own benefit. There will be several storms in coming years and near-crisis situations may emerge, but as the example of Poland shows, these can be weathered. Thanks to successful crisis management, Hungary is now performing similar to Poland, the central bank chief said. "Economic history will register it as a success that Hungary's GDP grew more than 3.5% annually between 2013 and 2019," he said, adding that labour market developments were key to success.

Our goal is to keep Hungary growing 2 percentage points faster in coming years than those we are trying to catch up to – that is, Western Europe.

Hungary is currently among less vulnerable countries, Matolcsy said, recalling that in 2010, Hungary was among the 10 most vulnerable economies in the world.

Following seven years of convergence, we would like to converge for another seven years, and for seven more years after that, Matolcsy said, adding that difficulties are mounting as the German economy is slowing, the UK is leaving the EU and the U.S. is locked in a trade war with China that also puts Hungary's Eastern Opening policy at risk. "This is a clash between an incumbent economic powerhouse and an emerging power, and it is more than a trade war," Matolcsy said, describing it as a struggle between East and West.

According to Matolcsy:

The risk of a no-deal Brexit has decreased but the Brexit itself is still a threat and the performance of the British economy will have a substantial impact on Hungary's convergence.
Italy's problems remain unsolved, while its economy is rather vulnerable.
The German economy is "sinking". Serious mistakes have been made in the car industry and these are now affecting the economy, while the banking system is also vulnerable.
The CEE region depends heavily on the German economy. This has been a driving force of success so far, but the ripple effect of a slowing German industry could reach Hungary in six to nine months.
Having an open economy in Hungary is an important factor, but it is also a risk as a global trade recession could cause problems.
The "quarrel" between the U.S. and China could jeopardise the results of Hungary's Opening to the East policy.
The ECB's decreased room to manoeuvre is another dark cloud. Mario Draghi saved the euro single-handedly, but major central banks are now limited in their options. "The ECB had gone as far as it could." Matolcsy described cooperation between national governments and central banks as very important, attributing the success of the U.S. to this as well. "In a potential crisis, the euro area could make less use of monetary and fiscal policy than would be required."
Meanwhile, there are vulnerable countries nearby. Turkey and Ukraine are not far from Hungary, but even events in Brazil or Argentina could influence the forint.
Geopolitical risks are also increasingly apparent, while the negative effects of vclimate change are already here with us.

In Matolcsy's view, the global economist elite has yet to grasp the connections between the above factors. The quantity theory of money or the Phillips curve have completely lost heir power, he added.

If harder times are coming both globally and with regard to Hungary's convergence, we have to take a step forward in competitiveness, Matolcsy said, recalling that the MNB has submitted a proposal package if 330 items to the government to improve competitiveness.

According to Matolcsy, a new economic programme is also required. It is not enough to improve competitiveness, we need a comprehensive economic stimulus programme, he said.

We also have to re-think the issue of budget reserves when certain industries are facing problems, Matolcsy stated. "If they are in trouble, economic stimulus is not sufficient, we need targeted measures to prop up the industry in question," he added.

We need to cement the current favourable labour market situation, Matolcsy told the audience. The biggest turnaround since 2010 has been in labour, and it is not over yet. It would make sense to attract Hungarian families and employees from abroad back to Hungary, while the purchasing power of wages must also be increased, he said.

Cover photo: MTI/ Szilárd Koszticsák