OECD Economic Outlook, Volume 2023 Issue 2

Hungary

Economic activity is projected to rise by 2.4% in 2024 and 2.7% in 2025, after a decline of 0.6% in 2023. Lower inflation, mainly driven by energy and food prices, is expected to support a gradual pick‑up in investment and private consumption. The main risks around the outlook are related to the pace of the decline in core inflation and the outcome of negotiations with the EU regarding the delivery of EU funds.

Reducing the budget deficit as planned will be key to rebuilding fiscal space in view of upcoming spending needs related to ageing and the green transition. Restructuring energy support by moving from price caps to targeted cash transfers to support vulnerable households would increase incentives for energy savings, reduce the exposure of public finances to fluctuations in global energy prices, and improve energy security. Productivity growth could be bolstered by strengthening competition in the transport, professional services and telecommunication sectors. This and a wider diffusion of digital skills would accelerate the digitalisation of firms.

The economy has emerged from recession

After four consecutive quarters of GDP decline, economic growth restarted in the third quarter of 2023. While business confidence remains low, especially in the construction and retail sectors, consumer confidence is slowly improving and the labour market is holding up well, with only a marginal increase in unemployment from 3.5 to 3.9% since the start of the recession. Inflation declined from over 25% in January 2023 to 9.9% in October, mainly driven by declining energy and food prices.

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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Energy price caps delayed the impact of the 2022 energy price shock on inflation but resulted in a significant fiscal cost. These price caps were either limited or removed later on, thus pushing up energy prices until the second half of 2023. Food inflation has been declining rapidly this year, but services inflation is stickier. Inflation expectations are consistent with a return to the central bank’s tolerance band of 2-4% by 2025.

Monetary policy is tight and fiscal consolidation is underway

The central bank started to lower its effective policy rate in the spring of 2023, but monetary policy remains tight. Considering the uncertainty related to the evolution of core inflation and the exchange rate, and the need to firmly anchor inflation expectations, further monetary easing is expected to proceed in a gradual manner. Fiscal policy is being tightened substantially, with a projected deficit reduction of around 3 percentage points of GDP between 2022 and 2025 but public debt is expected to remain higher in 2025 than prior to the pandemic. The main consolidation measures in 2023 include the non-repetition of past gas reserve purchases and an increase in temporary windfall taxes. In 2024-25, the main measures include lower government consumption and investment. However, in cyclically-adjusted terms, the bulk of fiscal consolidation has taken place in 2023. The energy price support provided to households is expected to remain in place in 2024 and 2025.

Economic growth is expected to rebound from 2024 onwards

Economic activity is projected to decline in 2023, mainly due to falling private consumption and investment in the first part of the year. Declining energy prices and economic activity are expected to lower inflationary pressures, which will support a gradual pick-up in household real incomes and private consumption. Public consumption and investment will provide less support to growth in 2024 and 2025, in line with the government’s objective of reducing the fiscal deficit. Exports are expected to pick up in 2024-25 as growth in Hungary’s main trading partners, including Germany, regains momentum. If core inflation proves more entrenched than expected, the central bank will need to keep rates higher for longer, affecting consumption and investment. A new surge in energy prices would have similar effects, while also straining public finances, given the utility price cap in place. Another risk is related to the delivery of EU funds. Failing to reach an agreement on the complete delivery of those funds may curb investor confidence, increase the cost of capital, and put renewed pressure on the exchange rate.

Structural reforms are needed for stronger and more sustainable growth

Reducing the budget deficit as planned will be important to rebuild fiscal space in view of the upcoming increase in ageing-related costs (over 5 percentage points of GDP by 2070) and the financing of the green transition. Restructuring energy support by moving from price caps to targeted cash transfers to support vulnerable households would increase incentives for energy savings and improvements in the energy efficiency of dwellings, reduce the exposure of public finances to fluctuations in global energy prices, and lower Hungary’s dependence on energy imports. Productivity growth could be bolstered by strengthening competition in the transport, professional services and telecommunication sectors. Lower telecommunication prices and a wider diffusion of digital skills would accelerate the digitalisation of firms and help Hungarian firms, especially SMEs, to bridge the digital gap with peer countries.