OECD Economic Outlook, Volume 2024 Issue 1

Hungary

GDP is projected to grow by 2.1% in 2024 and 2.8% in 2025, after a decline of 0.9% in 2023. Lower inflation and interest rates are expected to support private consumption and investment. In addition to risks related to international trade and global commodity prices, the main uncertainties for the Hungarian economy concern the pace of fiscal consolidation and the outcome of the negotiations about the delivery of EU funds.

Further fiscal consolidation is needed to rebuild fiscal space and strengthen public debt sustainability. Reforming the public pension system will be key to contain the projected increase in ageing‑related costs. Productivity growth could be bolstered by strengthening competition in the energy, transport, professional services and telecommunication sectors. This, and a wider diffusion of digital skills, would accelerate the digitalisation of firms.

Growth has gained momentum but remains fragile

After a decline from mid-2022 until mid-2023, output rose in the third quarter of 2023 but stalled in the fourth quarter. Inflation has declined from over 25% in January 2023 to 3.6% in March 2024, allowing real wage and private consumption growth to resume in the second half of 2023. While business confidence remains low, especially in the construction and retail sectors, consumer confidence is slowly improving. The labour market is holding up well, with only a limited increase in unemployment from 3.5% to 4.4% since June 2022, while employment increased slightly.

Hungary is currently attracting significant foreign direct investment in the manufacturing sector, mainly in relation to electric mobility, and this will eventually boost export capacity. Nevertheless, exports are currently held back by the slow growth in EU trading partners, which account for 80% of Hungarian exports.

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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Monetary policy is easing gradually and fiscal consolidation is under way

The central bank started to lower its effective policy rate in the spring of 2023. Considering the uncertainty around exchange rate developments and the need to fight remaining inflationary pressures, as reflected by inflation excluding food and energy prices at 6.3% in March 2024, further monetary easing is expected to proceed in a gradual manner. The monetary policy rate is projected to decline to 6‑7% by mid‑2024 and to stabilise at 5% in 2025. Fiscal consolidation is under way. While the headline deficit increased marginally to 6.7% of GDP in 2023, the structural primary deficit declined by 2.8 percentage points of GDP. A consolidation of similar magnitude is expected for 2024, driven by lower spending on energy subsidies due to lower energy prices, and a rebound in VAT receipts along with increasing private consumption. Hardly any improvement in the structural primary balance is expected for 2025. The projected decline in the headline deficit, from 4.5% of GDP in 2024 to 3.7% in 2025, is mainly related to the improving growth outlook. Significant risks surround this projection, as fiscal objectives were substantially and repeatedly revised downwards in the last months, and the design of the energy price support scheme to households exposes public finances to fluctuations in global energy prices.

Economic growth is expected to rebound from 2024

Growth is projected to strengthen gradually in 2024 and 2025. Disinflation is supporting a rebound in real wages and private consumption. Further monetary easing will underpin investment, despite uncertainty about the international environment related to international trade, energy prices, exchange rate developments and the release of EU funds. Government consumption growth is expected to resume, but will be constrained by the need to reduce the fiscal deficit. Due to slow growth in main trading partners including Germany, exports are expected to pick up only gradually, but the availability of new manufacturing capacity may boost exports from end 2024 onwards. Beyond uncertainty about external demand and energy prices, the main risk to the economic outlook in Hungary is the timing of the release of EU funds which are conditional on rule-of-law reforms. 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. On the other hand, a full release of the EU funds would contribute to boost public investment.

Structural reforms are needed for stronger and more sustainable growth

Reforming public pensions would limit the increase in ageing‑related costs, which is projected to exceed 5 percentage points of GDP by 2070 under the current legislation. Reducing the budget deficit as planned will provide space to finance the green transition and any remaining ageing‑related costs once pensions have been reformed. Restructuring energy support by moving from price caps to targeted cash transfers for vulnerable households would increase incentives for energy savings and improvements to the energy efficiency of dwellings, reduce the exposure of the public finances to fluctuations in energy prices, and lower Hungary’s dependence on energy imports. Productivity growth could be bolstered by strengthening competition in the energy, 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.