Index – Economy – The government cannot find a way out, they do not yet have a solution to this challenge

This year, growth may be lower than previously expected, around 1.5 percent. Following the second quarter GDP data, the government also adjusted its forecast downwards. Gábor Regős, the chief economist of Gránit Alapkezelő, has now highlighted to the Index that the low exports due to external demand, the low expansion of consumption (in addition to real wage growth of 9-10 percent, consumption expands by 2-3 percent), and the reduction of investments.

Several factors contributed to the latter: the uncertain economic situation, because why should someone make an investment if they cannot see whether there will be demand for their product; and the stuttering of EU funds, which is a kind of support dependency, as well as the expiration of previous tenders. The development of industrial performance, which drags down many economic indicators, is particularly problematic.

According to the analyst, there are indicators that have developed well: the current account has consolidated after the significant deficit in 2022, while inflation has decreased – even if it is currently above the central bank target. It is worth adding that Barnabás Virág, the vice president of the Hungarian National Bank (MNB), emphasized after last week’s meeting of the Monetary Council: according to his expectations, the consumer price index will return to the tolerance band, but “we have to further lower inflation expectations”. The central bank formulated a clear message:

According to Gábor Regős, in addition to this year’s lower growth – but at least growth – it is better to look to the future: stronger growth than this year is expected next year, partly due to large investments. The rate of growth will be determined by the development of external demand, as well as the extent to which consumption can expand. According to him, a big question is the rate of wage growth, which is determined by the tightness of the labor market in addition to the increase in the minimum wage and especially the guaranteed minimum wage.

In this regard, Minister of National Economy Márton Nagy recently shared his opinion on the Index: according to the government, it would be important to raise the minimum wage to 50 percent of average wages, in several stages, but by 2027 at the latest. Therefore, it is a clear goal that those with lower incomes approach the average wages. It is certain that income policy is highly valued within economic policy.

How much leeway does the central bank have?

In the current economic policy, three areas can be sharply distinguished from each other: the Ministry of Finance focuses on budget balance, the central bank focuses on price stability, and the Ministry of National Economy focuses on growth. The aspects are clear and even follow from the mandates – we previously wrote about this in detail here.

According to Gábor Regős, following the latest interest rate decision, it can be seen that the room for maneuver of monetary policy is not infinite, the interest rate decisions (in our case, the rate of reduction of interest rates) must always be carried out in the given market environment. But according to him, if the monetary policy makes a mistake, it costs a lot: the weakening forint results in higher inflation, which restrains consumption and reduces confidence in the forint, which in turn can lead to the migration of savings abroad and a further weakening of the exchange rate. Of course, it is also not good if the monetary policy is stricter than justified, as it can also slow down growth. This example perfectly illustrates how the three areas depend on each other.

According to the analyst, the scope of monetary policy is determined by several factors. You have to keep in mind the inflationary processes, the country’s risk perception – these were two factors that spoke against relaxation now. However, the international environment must also be taken into account, i.e. the monetary policy of large and regional central banks.

But the economist of Gránit Alapkezelő showed how complicated the situation is beyond the simple data with an additional aspect. Because the monetary policy of the regional central banks must also be taken into account. According to him, three central banks should be singled out here, the Czech, Polish and Romanian:

1. The Czech base interest rate is currently 4.5 percent – ​​this is the lowest of the three mentioned, well below the Hungarian rate of 6.75 percent. The Czech 10-year yield is 3.8 percent, while the Hungarian one is 6.3 percent, so the difference in magnitude is the same in short-term as in long-term yields – and the latter can also be used to measure risk perception.
2. The Polish base interest rate is 5.75 percent – this has not changed since last October, and given the evolution of inflation (it increased from 2 percent to 4.2 percent in March) and the tight labor market, no relaxation is expected this year. “The Polish 10-year yield is 5.4 percent, which means that the risk perception is more favorable here as well, we cannot approach them completely, this is a limit from the point of view of monetary policy.”
3. The Romanian base rate is currently 6.5 percent, and there was a relaxation of 25-25 basis points in July and August. The Romanian 10-year yield is currently 6.6 percent, so based on this, we can go somewhat, but not significantly, below the Romanian interest rate.

“Monetary policy therefore has limited room for maneuver, it can only relax moderately, the time of previous interest rate cuts of 75 or 100 basis points is over. This year, however, it is hoped that there will still be an opportunity to relax, based on risk assessment and the development of international monetary policy, 2 interest rate cuts seem the most likely, but in a very favorable case, 3 cuts are also not out of the question”, concluded Gábor Regős.

Is the budget in a difficult situation?

The Ministry of Finance is in a similar situation, the scope of fiscal policy is also limited. The market and credit rating agencies expect the government to maintain the 4.5 percent deficit target, which must be kept in mind. The first four months of the budget were poorly managed, with a high deficit. A turnaround followed from the fifth month, the deficit developed favorably, and in fact two of the three months were characterized by a surplus.

“For example, the increase in VAT revenues played a role in this. Thanks to this and the announced measures, it became possible to maintain the deficit target, but I would not say that there is much room for maneuver in the budget. Tight management is necessary, but if there is minimal room for maneuver, it may be worthwhile to take advantage of it – even by regrouping”, underlined the leading economist of Gránit Alapkezelő.

It is no coincidence that the Minister of Finance Mihály Varga recently explained in the columns of the Index: the goal is still to keep the Hungarian budget on the three-year path that results in a deficit of 4.5 percent this year, 3.7 percent next year and below 3 percent in 2026 . We could not do otherwise, based on the decisions of the European Commission, excessive deficit proceedings are expected to be launched against seven countries, and Hungary is among them. “By the fall, plans must be put on the committee’s table that outline how we can stay on the path to reducing the deficit,” said the head of the ministry.

The detailed rules of the new type of procedure that will come into force have not yet been clarified, currently it can be calculated that, unlike the previous procedures, the medium-term national structural program must be submitted by the end of September. It is worth noting that, according to Mihály Varga, “patient and consistent economic policy” is what can encourage economic actors to consume.

According to Gábor Regős, the compatibility of the three aspects means a paradoxical situation: if the budget and monetary policy are strict, at first glance it means less growth. However, if the budget or monetary policy is too loose, it means an imbalance, for which we pay the price in the shorter or longer term – with higher inflation or higher risk premiums. The common goal is to put the economy on a growth path where the balance indicators (budget, balance of payments, inflation) are also in order.

What can the government do?

“Let’s not forget that it is the domestic economy, i.e. domestic trade and industry that sells to internal markets, that the fiscal and monetary policies have the greatest impact on in terms of transmission, on the other hand, they have no effect on external demand,” said Márton Nagy to the Index earlier. Both the central bank, the Ministry of Finance, and the Ministry of National Economy now like to refer to the problems of external demand.

Undoubtedly, the weakening of foreign markets has a very significant effect, which can be observed primarily in Germany within the European Union. Thus, the question justifiably arises as to how much the Hungarian economy is determined by external factors: can it recover even if our foreign market is weakening?

According to Gábor Regős, Hungary, as a small, open economy, naturally depends on the performance of its foreign markets – moreover, even the largest markets depend on the economic processes of other countries. In terms of our country, the EU member states stand out, where most of our exports go. A weak external demand determines a lower GDP growth.

This does not mean that we should be satisfied with the fact that the foreign market situation is bad now, and then there can be no growth – if we just wait for a miracle to happen with external demand, there will be no catch-up. Therefore, the weakening of the foreign market must now be considered a given, and taking this into account, we must make the most of the situation

– the leading analyst of Gránit Fund Management summarized for the Index.

We know that the Economic Cabinet has currently prepared an action plan for the government. It also turned out that, according to the government, the economy should take on an inclusive character in the direction of SMEs, and they want to focus on families, young people, and rural residents. One element of this is that the family tax allowance for children will be doubled next year. I want to support families so that they can use their savings to build a home as easily as possible.

According to Gábor Regős, we now basically have to think about programs and measures that do not require a lot of resources, but in return provide relatively high utility. Here, the development and assistance of SMEs can be one of the important aspects – these are typically domestically owned enterprises and do not move to another country overnight.

At the same time, it is important that the country benefits as much as possible from the ongoing large-scale investments: the construction industry should play a larger role in these, and we will find a higher proportion of domestic companies among the subsequent suppliers – this may be important to record when concluding the support contract. The government previously emphasized that Hungarian businesses should be connected to foreign investments at a higher level. Among the direct first-round suppliers (Tier 1) of the large international companies, the Hungarian presence is smaller and the foreign share is dominant, currently only among the second-round suppliers (Tier 2) are Hungarians competing with foreigners.

While Hungarian companies currently have a 45 percent share of sales at the Tier 2 level, in Tier 1 the Hungarian sales share is 20 percent. Thus, it may be worthwhile to support this step to a higher level in a targeted manner. Even with credit programs whose discounted part can only be applied at a higher supplier level. However, according to the analyst, the strengthening of confidence among both households and businesses can also be an important factor, which can help the growth of consumption and investments.

(Cover photo: Kitti Kolumbán / Index)