OECD Economic Outlook, Volume 2022 Issue 2

Hungary

Growth is projected to decline from 6% in 2022 to 1.5% in 2023, before recovering to 2.1% in 2024. The slowing reflects persistently high inflation, the economic fall-out of Russia’s war of aggression against Ukraine, weaker external demand and negative confidence effects. Private consumption is likely to be dampened by increasing unemployment and a deceleration of real wages. Business investment is projected to slow in the face of high interest rates and falling demand, although this is to be partly offset by higher public investment amidst an inflow of EU funds.

Further monetary tightening may be warranted to contain inflation. Fiscal policy will turn restrictive in 2023, but more restraint is needed to reduce inflationary pressures. Support to groups that are vulnerable to high energy prices and to improve the often-poor thermal efficiency of the housing stock should be financed through savings elsewhere. 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 in face of headwinds

Economic activity has been slowing in the second half of 2022 before turning negative under the impact of increasing inflation, high energy prices, higher interest rates and deteriorating consumer and business confidence. Retail sales have declined. Nonetheless, the labour market has remained strong with a stable unemployment rate of 3½ per cent over the summer – half a percentage point lower than a year earlier – underpinning strong wage growth. By mid‑2022, private sector wages had increased 14% year-on-year. This contributed to pushing core inflation to 12.4% and, together with higher food and energy price, headline inflation to 21.1% in October.

Hungary

1. All persons aged 15 years and over.

Source: OECD Composite Leading Indicators database; and OECD Main Economic Indicators database.

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Hungary: Demand, output and prices

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Hungary imports about 95% of its gas and 45% of its oil and petroleum products from Russia. These shares are expected to remain unchanged with exemptions from EU sanctions. Starting in late 2021, the government has been introducing price ceilings for petrol, diesel and seven fundamental foodstuffs to combat fuel and food inflation. These measures are expected to reduce inflation by approximately 4 percentage points. In addition, the re-introduction of a 13^th month of pension payment was completed. Almost 1.5 million refugees from Ukraine, equivalent to nearly 16% of the population, had arrived in Hungary by the end of August, which has led to temporary spending pressures on education, health care, and social assistance. Nearly 60,000 of these have obtained work permits, while many have moved on to other European countries.

Monetary policy continues to combat inflation

After raising the base rate from 11.75% to 13%, the central bank announced the end of its base rate increases in September 2022. Subsequently, monetary conditions were tightened by absorbing liquidity through higher reserve requirements and the introduction of longer instruments. In October, the effective monetary policy rate – the rate on overnight deposits – was increased to 18%, while the overnight lending rate (the upper bound of the interest rate corridor) was raised to 25% to contain market turbulence, leaving the base rate unchanged. As part of the broader unwinding of monetary support, the bank discontinued government bond purchase programmes and other crisis management programmes in late 2021. To anchor inflation expectations, the continued acceleration of inflation may necessitate higher policy rates for a limited period of time; these are assumed to reach up to one and a half percentage points. In 2022, fiscal policy was expansionary. Fiscal measures to tackle cost‑of‑living issues have been introduced. These include higher public sector wages, an income tax exemption for those under 25, a pension bonus and new tax reductions for households and businesses, financed to a large extent by higher taxes and spending restraint in other areas. In 2023 and 2024, fiscal policy will be restrictive as the temporary measures are phased out. Nonetheless, the public deficit will decline only gradually as the economy slows.

Growth will be restrained by inflation before picking up in 2024

The slowing of the economy in 2023 reflects the impact of high inflation and weaker external demand. Private consumption will hardly expand due to falling real disposable incomes. Exports are decelerating as export markets slow under the impact of high food and energy prices. Job creation will lose speed, contributing to higher unemployment and slower wage growth. Consumer price inflation will come down, although only slowly as the labour market remains relatively tight and as the depreciation of the forint adds to domestic inflationary pressures. Downside risks to growth include lower-than-projected wage moderation that would boost inflation, and the emergence of energy shortages. On the upside, a faster-than-expected recovery in export markets would stimulate domestic production.

Securing stronger growth

Additional fiscal tightening would alleviate inflation pressures and prepare public finances for future ageing‑related spending pressures. Additional fiscal measures to combat the energy crisis should be focussed on groups most vulnerable to higher energy prices and on improving the often-poor thermal efficiency of the housing stock. Long-term productivity growth is weak. A more competition-friendly regulatory framework would strengthen competitive pressures, foster new market entry and help spur the adoption of new technologies. Labour reallocation and geographical mobility are important given the tight labour market but are held back by a rigid housing market and an underdeveloped rental market, in addition to remaining weaknesses in local transport and rural commuting infrastructure.