The golden age is over, Hungary FinMin says

We are at the border of two eras, which means the golden age is slowly about to end, Varga told the audience of the conference. The worsening external environment will affect the European Union and Hungary as well, but there is no recession yet, he added.

The growth of the Chinese economy is slowing, although it is still above 6%, while growth is around 2% in the U.S. and even less in the EU. Germany's industry has been performing poorly for nearly a year now, but there is no downturn in the service sector as yet, Varga said. In his view, the performance of the service sector is the reason there is no recession, although business confidence has not been this low in Germany since 2012.

In his talk, Varga also disagreed with György Matolcsy, head of the National Bank of Hungary (MNB), who had earlier said German problems would reach Hungary in six to nine months. According to Varga, the ripple effect of a slowing German industry will not reach Hungary. "They have been slowing for nearly a year now, and we see no effect of this in Hungary," he said, adding that this is partly explained by the fact that the premium car makers that have invested in Hungary are still doing well.

According to Varga, Hungary has economic growth potential of 3% to 3.5%, lower than its current 5% GDP growth rate but much higher than the less than 1% growth potential in 2010. This shows that government measures significantly improve GDP growth, he said, adding that EU funds only contribute 0.2 percentage points to growth.

The finance minister pointed out that the U.S. now has an inverse yield curve, investor confidence is palpably low, while the price of gold is rising and an increasing number of people search for the word 'recession' online. According to Varga, a slowing economy does not equal recession, but even in case of a global recession, the Hungarian banking system is much more resilient than 10 years ago, the ratio of government debt in foreign currency or debt held by foreigners dropped to 20% from 50% in 2010, while the budget is stable. The yield of Hungary's 10-year government bond has dropped below that of its Polish counterpart, Varga pointed out, adding that he expects further rating upgrades as a result.

According to Varga, attention must be paid to several factors in the current situation:

• It is important to preserve balance in a slowing environment. "Fiscal overspending or the spending of reserves must be rejected, because it is fiscal discipline that makes us credible. We can't balance out the budget one year and start spending the next," he said.
• We must try and keep investments high so that convergence remains unbroken.We need a predictable and stable exchange rate for this. Unstable currencies are a major concern for investors, and wage growth for employees can be annulled if the forint weakens.
• It is also important to mobilise the labour reserve. Those unemployed or currently employed in public works must be channelled back to the primary labour market. Varga is also counting on working pensioners and would increase employment among women.
• Executing policy proposals is also very important, because Hungary is strong in policy-making but these programmes also have to be carried out.
• The competitiveness of businesses must be improved, especially that of SMEs.
• Finally, preserving political and financial stability is also very important in a period of slower global growth.

Cover photo: MTI/ Zsolt Szigetváry