SPECIAL TOPIC: PRE- AND POST-CRISIS SCENARIOS OF FINANCE-NEUTRAL ECONOMIC GROWTH
5.1 Introduction In the period before the financial crisis, favourable economic growth in many economies was accompanied by an expansion in lending and the resulting increase in demand. Financial development and the expansion of financial integration that took place in the emerging countries during the two decades that preceded the crisis were typically identified as a process that made a positive contribution to the long-term growth (for a fundamental and empirical review see Levine (2005)). However, the literature did not reach a consensus on the unambiguously positive nature of capital flows in the emerging countries. On the one hand, the growth-supporting role of inflows of external funding is generally questionable in the case of converging economies (Prasad et al. 2007), while on the other hand, some of the studies also highlighted the risk of excessive foreign currency lending (Backé et al. 2006, Kiss et al. (2006)). Accordingly, the impact of credit expansion, i.e. the increase in indebtedness, does not only have a long-term growth-supporting effect. Credit expansion may also have a substantial cyclical effect, which was typically underestimated before the crisis, while the rate of sustainable growth was systematically overestimated (Borio (2012)). The reason for this is that – beyond the analysis of factors of production and inflationary pressure – no great importance was attached to the development of financial risks and financial imbalances. However, in addition to or instead of financial deepening, considerable financial cycles, spanning over business cycles, developed. The financial imbalances significantly intensify both economic upturns and downturn, and thus the observed GDP may substantially differ from the economy's actual growth potential. This financial accelerator effect is not necessarily symmetric, and thus the economic cost of financial cycles may also be significant on aggregate, in which case the growth surplus “won” before the crisis is substantially less than the economic downturn suffered after the crisis. Rebalancing through deleveraging enforced by the financial crisis may also be a slow, prolonged process and materially influence the rate and structure of a country's economic growth. Between 2009 and 2015, Hungary experience substantial deleveraging in the corporate and household sectors, accompanied by a major, prolonged cyclical downturn in recent years through the decline in investment activity and the contraction of households' consumption expenditures. The purpose of this analysis is to examine, relying on existing methodologies, the magnitude of the economic impact generated by the financial cycle in total, before and after the crisis. The period 2002–2015 is of suitable length to allow us to evaluate the pre- and post-crisis economic impacts of excessive lending using different methodologies. Dividing the period examined into two equal sequences (2002– 2008 and 2009–2015), we examined the build-up of the unsustainable indebtedness and the post-crisis deleveraging thereof. Due to the methodological framework, the analysis covers only the review of the private sector's (households, corporations) indebtedness, and thus does not contain debt developments related to the general government.
GROWTH REPORT • 2016
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