OECD Economic Outlook, Volume 2019 Issue 2

Hungary

The strong recovery is projected to slow in line with external demand to slightly above 3% in the next two years. Private consumption will continue to drive growth on the back of strong gains in real incomes. Public investment will decelerate along with declining disbursements from EU structural funds. Capacity constraints will bolster business investment and imports. The tightening labour market continues to push up wage and price inflation.

Fiscal policy will remain supportive as social security contributions are further reduced and public spending, including on wages, is increased. The central bank is expected to continue its loose monetary policy stance. However, counter-cyclical policies should address signs of overheating and contain inflation expectations. Policies to bolster geographical labour mobility and labour supply, including expansion of early childhood care, would prolong the recovery.

Domestic demand is the main driver of growth

Household demand remains strong, driven by continued solid gains in employment and real wages, an all-time high consumer confidence, housing investment support schemes and very accommodative monetary policy. Other investments are underpinned by large disbursements of EU structural funds, the demand-driven expansion of production capacity and FDI in the export‑oriented automotive sector as well as supportive monetary policy. Exports have slowed in line with foreign demand, while imports continue to expand in response to strong domestic demand.

Exchange, interest rates and inflation and wages: Hungary

1. Higher values indicate that the currency depreciates, while lower values that it appreciates.

2. Core inflation excludes food products and fuels.

Source: OECD Economic Outlook 106 database; OECD Main Economic Indicators database; and IMF International Financial Statistics database.

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Hungary: Demand, output and prices

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The unemployment rate has fallen to an all-time low of less than 3½ per cent, as total employment reached a historical high in late 2019 on the back of strong job creation in the private sector, partly offset by the roll‑back of public work schemes. Private firms are reporting widespread labour shortages and the job vacancy rate is among the highest in Europe. The tight labour market and higher minimum wages are underpinning continued double-digit wage growth in the private sector. Further lowering of employer social security contributions partly offset the increase in total wage costs. Nonetheless, core inflation has continued to increase, while headline inflation has eased to below 3% on the back of lower energy prices. A weakening of the forint is adding to inflation pressures.

Reversing macroeconomic policies would sustain the upswing

Lower social security contributions for employers and higher public sector wages and subsidies for house purchases are supporting growth. This effect is reinforced by low monetary policy rates, including a negative overnight deposit rate. Decreasing the stimulus policies gradually would reduce the risk of overheating and contain inflation expectations.

The strong economy presents an opportunity for strengthening fiscal sustainability, reducing old‑age poverty, and improving access to healthcare services. This should be combined with measures to improve geographical labour mobility, accelerate the reduction of public work schemes, and expand early childhood care, which would advance work‑life balance, in order to bolster the labour supply and prolong the recovery.

Slower growth will not remove inflationary tensions

The economic recovery is projected to slow to a pace of just above 3%, enough to secure continued employment gains. Private consumption will remain the main growth driver, benefitting from solid real income growth. Business investment will be underpinned by the need to expand production capacity. The strong domestic economy and capacity constraints will bolster import growth, while exports slow along with weaker international trade and increasing labour costs. Downside risks are centred on higher‑than‑projected wage increases, leading to rising inflation expectations. Also, a further weakening of export markets would worsen the growth outlook. On the upside, lower‑than‑projected import price growth could moderate domestic price developments and sustain the upswing.