OECD Economic Outlook, Volume 2023 Issue 1

Hungary

The recent slowdown in activity is expected to continue in early 2023. Real GDP is projected to stagnate in 2023, before rebounding by 2.5% in 2024. High inflation, high interest rates and low confidence will weigh on consumption and investment in 2023. Inflation is projected to decrease significantly after mid‑2023. As it recedes, growth is expected to strengthen. The recession and its tepid recovery relative to the past will cause unemployment to increase slightly.

Monetary policy is expected to remain restrictive and fiscal policy will tighten in 2023, both of which will help to contain inflation. Reducing the budget deficit and reaching an agreement on the delivery of EU funds will be key to maintain investor confidence and create fiscal space to finance the green transition. Productivity growth should be raised by accelerating the digitalisation of the economy, fostering competition in product markets, and strengthening labour mobility.

The economy is slowing

The economic slowdown that started in the second half of 2022 is expected to continue in the first half of 2023. At 24.0% in April 2023, headline inflation has peaked, but this is not yet the case for core inflation, defined as excluding food and energy (at 17.1% in April). High inflation is eroding household purchasing power and consumption, while tight financial conditions and economic uncertainty are holding back investment. Quarter-on-quarter GDP growth in 2023Q1 was -0.3%, which is the third successive quarter of negative GDP growth.

Hungary: Economic growth and inflation indicators

Source: OECD national accounts database; OECD Consumer Prices database; and OECD calculations.

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Hungary: Demand, output and prices

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Inflation in Hungary is currently the highest in the European Union. International energy and commodity price increases, compounded by currency depreciation, a tight labour market with strong wage growth, and expansionary fiscal policy until the first half of 2022 have all added to inflationary pressures. While price support measures helped to contain energy prices for most of 2022, the price cap on residential energy consumption only applies up to a threshold consumption level since August 2022 and those on motor fuels were removed in December 2022. Despite price caps on specific food products, food price inflation accounted for more than a third of headline inflation in early 2023, twice as much as energy. While inflation is expected to decline, inflation expectations of professional forecasters for 2024 remain above the central bank’s 3% inflation target.

Monetary policy is restrictive and fiscal policy is expected to tighten in 2023

Monetary policy has tightened significantly since the end of 2021. The base interest rate has been raised to 13% and the overnight deposit rate, which has effectively become the monetary policy rate, currently stands at 17%. Higher minimum reserve requirements have added to tighter financial conditions. It is assumed that the monetary policy stance will remain broadly unchanged until the end of 2023, when inflation should have declined visibly. Fiscal policy is also expected to tighten in 2023, with slower growth of public consumption and public investment and higher business taxes in specific sectors. Nevertheless, the assumed phase-out of these temporary taxes in 2024 and the gradual increase in public debt financing costs will limit the decline in the fiscal deficit. Fiscal support measures should become increasingly targeted on the most vulnerable groups affected by high food inflation, and eventually support will need to be phased out.

Growth is expected to be muted in 2023 before picking up in 2024

Declining energy and commodity prices, tight financial conditions, and slower job creation contributing to slightly higher unemployment and slower wage growth are expected to pull down inflation, especially in the second half of 2023 and in 2024. This will support a progressive pick-up in GDP growth, driven by rising investment, and to a lesser extent private consumption. Downside risks to this scenario include stronger-than-expected wage pressures, more persistent inflation, especially for food and core items, renewed pressures on the exchange rate, and potential energy supply restrictions during next winter, as Hungary is still highly dependent on Russia for its oil and gas imports. On the upside, a faster recovery in export markets would stimulate domestic production.

A package of bold reforms would secure strong and inclusive growth

Reducing the budget deficit further and reaching an agreement to allow the delivery of EU funds will be important to maintain investor confidence and accelerate investments in the green transition. Incentives for improving the often-poor thermal efficiency of the housing stock and the development of low-carbon energy sources for the production of electricity could be bolstered. The latter would also reduce Hungary’s high energy import dependence and prepare for rising electricity demand as electrification advances. Productivity growth could be boosted by a more competition-friendly regulatory framework that would strengthen competitive pressures, foster new market entry, and help spur the adoption of new technologies. A rigid housing market and an underdeveloped rental market, in addition to remaining weaknesses in local transport and rural commuting infrastructure, are currently holding back labour reallocation and geographical mobility. Similarly, the insufficient availability of affordable, high-quality childcare is holding back the participation of young women in the labour market. The number of childcare facilities has increased by nearly 20% since 2017 and further increases are expected in line with the economic policy priorities of Hungary.