Rebalancing in a low growth environment Prof. Dr. Júlia Király October 30th, 2012 PhD of economics, honorary professor, deputy governor of the Magyar Nemzeti Bank

Accumulated imbalances resulted in the present crisis Hungary: accumulated imbalances - huge external adjustment: persistent surplus in the current account –all economic players are deleveraging Fiscal balance: a deficit under 3% of GDP is within reach Low growth environment: lack of investment, paralysed financial intermediation Confidence and credibility: a commitment to more balanced policies can quickly pay off Main messages

„Euro-crisis” – consequences of accumulated imbalances (2011) 3 Júlia Király - Rebalancing in a low growth environment Source: Eurostat

Júlia Király - Rebalancing in a low growth environment 4 Hungary: high net external liabilities and debt (2011) Source: Eurostat

Júlia Király - Rebalancing in a low growth environment 5 High public debt compared to peers (2011) Source: Eurostat

6 Júlia Király - Rebalancing in a low growth environment FX indebtedness of corporates and households

7 Júlia Király - Rebalancing in a low growth environment Indebtedness of households – in proportion of personal disposable income

8 Júlia Király - Rebalancing in a low growth environment The way out: adjustment + growth

9 Júlia Király - Rebalancing in a low growth environment Significant adjustment in the current account…

10 Júlia Király - Rebalancing in a low growth environment …driven by net savings of the private sector…

…accelerated by deleveraging in the banking system Júlia Király - Rebalancing in a low growth environment

Net external debt in percentage of GDP …resulting in a more sustainable external debt position 12 Júlia Király - Rebalancing in a low growth environment

13 Fiscal adjustment: ahead of peers Decomposition of debt dynamics Source: European Commission Júlia Király - Rebalancing in a low growth environment

Following a lapse in 2011 significant fiscal tightening in 2012 Júlia Király - Rebalancing in a low growth environment 14

GDP decomposition 15 Júlia Király - Rebalancing in a low growth environment Economic activity driven by net export

Labour market participation is on the rise due to structural reforms; unemployment rate is still high 16 Júlia Király - Rebalancing in a low growth environment

17 Júlia Király - Rebalancing in a low growth environment Lack of confidence: a major factor behind weak consumption…

…underperforming bank lending… Loans to the nonfinancial corporate sector in the CEE region Oct = 100 per cent, exchange rate adjusted. 18 Júlia Király - Rebalancing in a low growth environment

…and declining investment 19 Júlia Király - Rebalancing in a low growth environment Net investment to GDP ratios in European countriesGrowth rate of corporate investments ( )

Threatening slowdown of potential growth 20 Júlia Király - Rebalancing in a low growth environment

The economy is in recession again, negative cyclical position Inflation is above target due to cost shocks and tax measures Improving risk perceptions due to Fed/ECB measures Monetary policy’s dilemma Júlia Király - Rebalancing in a low growth environment 21

22 Júlia Király - Rebalancing in a low growth environment Inflation above the 3 per cent target due to tax measures, food and energy price increases

23 Júlia Király - Rebalancing in a low growth environment Improving risk perception due to global developments

A significant part of the external adjustment is already behind us Persistent C/A surplus, shrinking net external debt level Painful fiscal austerity measures already introduced Lasting primary surplus A deficit below 3 % of GDP is within reach Low growth environment is a huge challenge A commitment to more balanced policies can quickly pay off via increasing consumer and business confidence Stability and predictability can help restoring bank lending to a more normal level Structural reforms to address remaining supply side problems 24 Júlia Király - Rebalancing in a low growth environment Summary