The healthcare measures and security restrictions imposed to curb the coronavirus epidemic caused economic slowdowns all over the world, and the pandemic brought about a crisis. Did they expect such a crisis? Certainly not. Like a war, the coronavirus suddenly froze demand and supply in the real economy. The Great Recession of 2008 was different, as its underlying causes were the internal imbalances of the financial and credit economies. As the sources of growth immediately went dry back then (lending paralysed, trust collapsed), restarting the economy was an exceptionally long process and took years. Despite the different points of departure, do we have similar outlooks today, too?
Is the Hungarian economy crisis-proof?
In 2020, the expectations of many market analysts became reality, and the longest economic cycle in the modern history of the global economy came to an end.
A great many wrong answers have been given to this crucial question in recent weeks. Responses which saw the signs of “the end of the world” in the “unprecedented” growth of the budget deficit or the government debt. In times of peace, a well-managed government debt and the budget deficit are the stabilisation tools to defend against and absorb economic and social shocks during “times of war”. One should spend in case of trouble and when help is needed. One should save and set funds aside when things go well. Not the other way around. If the government is forced to impose austerity measures, as it happened in 2008–2009, then it means that it did not manage well in times of peace, made itself vulnerable, overspent, got indebted to foreigners, etc. It lost its stabilisation tools too early.
Hungary’s crisis-resistance is much better today than it was in the 2008 financial crisis, meaning that it could weather the recession with less economic sacrifices.
Notable reasons for optimism are that the crisis hit Hungary at the top of the economic cycle, significant investments have been made in recent years, employment has reach unprecedented levels, poverty and household indebtedness have substantially decreased, and the latter has shifted to a “healthier” structure through the elimination of foreign currency credits, and the change of the composition of the government debt also strengthened the crisis-resistance of Hungary. The openness of the economy, the high relative weight of certain sectors or the narrower room for monetary policy, however, need caution and cool heads regarding the expected recovery.
The market economy is cyclical: growth is sometimes stronger, sometimes weaker, and recessions can also happen. With the gradual globalisation of the world economy, local problems (currently the pandemic that first emerged in China) spread faster and faster in the world. This is a risk to small open economies like Hungary, because it cannot insulate itself from the global economic shock. The extent of these impacts does, however, matter, just like the condition they hit our economy in.
The crisis of 2008-2009 had an especially severe impact on Hungary, the recovery lasted years, until 2014. We could not lay back for long, the next global crisis came in 2020. The long-term effects of the crisis are still unknown at the time of this study, no factual data are available regarding the total downturn in the economy (GDP) or the labour market, because the fight against the virus is still on.
At the same time, we can see that the economy is gradually restarting, and that the crisis has been prevented with predominantly Hungarian and market resources, asking the IMF for credit has not been necessary.
It is still early to draw the final conclusion, but we can already report on the preparation. The chapters of this study review key macroeconomic indicators and analyse the overall condition of the economy before the current crisis as well as before the 2008–2009 crisis. This study will also review how risk factors changed between the two crises, with special attention to their impact on the recovery. The transformation of the structure of the economy and of taxation, increasing employment, increasing investment activities, and the elimination of the risk factors that existed before the 2008 crisis (high household and business indebtedness, foreign currency lending) in recent years increase the chances of not having a long recovery from the crisis. A quick recovery is crucial for preserving the results of the recent years (increasing wages and employment, reduction of poverty, decreasing government debt) in the long run and enabling Hungary to continue to catch up to the more developed countries of the European Union.
This study is included in the collection of studies “Hungary 2021: Society, economy and politics today”, published by Századvég Kiadó in February 2021. It is available in full on the website of Századvég.