1. 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

2. 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

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

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

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

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

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

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

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

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

11. …accelerated by deleveraging in the banking system... 11 Júlia Király - Rebalancing in a low growth environment

12. 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. 13 Fiscal adjustment: ahead of peers Decomposition of 2007-2012 debt dynamics Source: European Commission Júlia Király - Rebalancing in a low growth environment

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

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

16. 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. 17 Júlia Király - Rebalancing in a low growth environment Lack of confidence: a major factor behind weak consumption…

18. …underperforming bank lending… Loans to the nonfinancial corporate sector in the CEE region Oct. 2008 = 100 per cent, exchange rate adjusted. 18 Júlia Király - Rebalancing in a low growth environment

19. …and declining investment 19 Júlia Király - Rebalancing in a low growth environment Net investment to GDP ratios in European countriesGrowth rate of corporate investments (1996 - 2012)

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

21. 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. 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. 23 Júlia Király - Rebalancing in a low growth environment Improving risk perception due to global developments

24. 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