During the Autumn of 2006 we had quite an exchange of opinion on this blog about the future destiny of the Hungarian economy, largely between me and Doug Muir. At the time Doug was relatively optimistic, and I much less so. We nearly even had a bet about whether Hungary would enter recession during 2007, a bet which it turns out I would have lost had I taken Doug up on the challenge, since, although the jury is still out on what happens in the 4th quarter, Hungary may just manage to eke out positive growth right through to years end, but only by a very short nose, as a quick glance at the chart in this post here will reveal.
In truth, at the time I didn’t really know enough about the Hungarian economy to hold a strong opinion, but I was struck by the peculiar and combustible mixture of problems that the country seemed to be facing, with deficits everywhere (both fiscal and current account), private individuals who seemed to be addicted to the contraction of non-local currency debt (largely in Swiss Francs) at a rather alarming rate, a central bank which seemed to be condemned to try and drain the ocean with a teaspoon given the limitations and strong headwinds they faced when trying to implement standard monetary policy in the face of the new rules of financial globalisation, and a population which was falling due to both the low fertility level, and the comparatively low level of male life expectancy which existed (something which complicates enormously the normal policy remedy for ageing workforces of increasing the employment participation rates of the over 60 age group).
Twelve months later, and with a brief public scuffle with the Economist safely under my arm, I have no such doubts. Hungary is heading for recession, whether the dreaded R flag is actually raised in this quarter or the next one, and when it does come, unfortunately, it is unlikely to be a brief and easily brushed-off affair, since all the dials which now point to red indicate that unwinding this particular distortion is likely to be a very slow and painful process. One of the reasons I now feel so confident in making this statement is that some 12 months ago, and hot the heels of my debate with Doug, I founded the Hungary Economy Watch weblog, to study the problem, and while scratching and scratching my head, try to work out just why it is that Hungary is apparently so different from the rest of the EU10, and indeed whether the study of Hungary and its problems might not help us see what might eventually be in store for the rest of the group after the big overheating correction finally takes place. Continue reading