Hungary - Country Commercial Guide
Market Overview

Discusses key economic indicators and trade statistics, which countries are dominant in the market, and other issues that affect trade.

Last published date: 2021-11-19

Hungary, located in Central Europe with a population of 9.6 million people, successfully transitioned from a centrally planned economy to a market-based one after the fall of communism in 1989. It is a member of the OECD (1996), NATO (1999), the European Union (2004), and the Schengen Zone (2007).  Per capita income is two-thirds that of the EU-28 average and total GDP in  2020 was $ 155 B. Hungary boasts a strategic location in Europe, easy access to EU markets, a highly skilled and educated  workforce, and a sound infrastructure which have led companies such as GE, Arconic, Blackrock, UPS, Coca-Cola, National Instruments, Microsoft, IBM and many others to locate manufacturing and services facilities in the country.  According to Uniworld, there are more than 400 wholly-owned U.S. companies in the country while the Government of Hungary statistics indicate U.S. affiliates employ approximately 110,000 Hungarians.  This makes the U.S. the second-largest investor in Hungary after Germany, in terms of employment numbers.

FDI in Hungary has helped modernize industries, create jobs, boost exports, and spur economic growth.  Hungary’s cumulative FDI stock since 1989 totals more than $98B and is centered around key sectors such as automotive, IT, electronics, logistics, food processing and shared service center operations.  In order to stimulate additional foreign investment, in 2017 the government lowered the corporate tax from 19% to 9%, the lowest in the European Union.

Economy

The economy is projected to grow by about 5% per annum in 2021 and 2022. Economic activity is expected to rebound from mid-2021 onwards, as a swift vaccination rollout supports the recovery of private consumption. External demand will strengthen with the recovery in major European trading partners. The labor market will continue to improve, while high wage growth and a recent currency depreciation will further add to inflationary pressures. Fiscal policy will remain supportive as long as COVID-19-related restrictions are in place. The central bank has limited room for further easing given the elevated inflation rate. As the recovery gathers pace, the phasing out of temporary measures to preserve jobs and businesses is needed to enable an effective reallocation of resources. In the medium term, changing the tax mix is key: labor taxes should continue to be lowered to raise labour force participation and environmental taxes increased to promote more environmentally sustainable growth. 

Industry continues to recover while service activity remains subdued. Industrial production and exports rebounded strongly in late 2020 and are now exceeding their pre-pandemic levels. Business confidence has continued to strengthen. Service sectors are held back by containment measures. The labor market improved, as reflected in a fall in the unemployment rate by 0.4 percentage point in early 2021, while the employment rate rose by 0.7 percentage point. Gross earnings of full-time employees in the private sector continued to register strong growth, at around 8.9% in early 2021, as the tripartite wage agreement raised minimum wages by 8% in 2020 and 4% in 2021. Partly reflecting the continued weakening of the currency, headline inflation has been above the central bank’s target of 3% since February 2021.

Policy continues to provide relief. A comprehensive fiscal stimulus package, including wage support and home-building subsidies, is supporting economic activity. In 2021-27, additional investment of 3.4% of GDP will be financed by EU funds. The central bank’s accommodative monetary policy is further supporting aggregate demand and liquidity. Furthermore, to help bridge the temporary payment difficulties of borrowers, the government extended the loan repayment moratorium until mid-2021, and the central bank raised the amount of its SME financing program “Funding for Growth Scheme Go!” to 6% of GDP. A major factor in avoiding a stronger rise in unemployment was the extension of the short-time work scheme in heavily affected sectors for the duration of the pandemic. These measures amount to about 5% of GDP in discretionary one-offs and will contribute to an expected budget deficit of 7.5% of GDP in 2021.

The recovery is set to strengthen. Economic activity is projected to recover strongly in the second half of 2021, reflecting the lifting of restrictions as vaccine programs are rolled out. Private consumption will be driven by the release of pent-up demand and the normalization of saving after the increase in 2020. External demand will strengthen with the recovery in major European trading partners. Investment is expected to rebound on the back of stronger inflows of foreign direct investment and EU Recovery and Resilience Facility funds. The ongoing labor market recovery will allow unemployment to reach pre-pandemic levels in 2022. Nonetheless, wage growth is projected to remain high, and inflation will stay elevated. Downside risks include prolonged supply-chain problems, which could disrupt the production of export goods. Faster than expected wage growth and a further currency depreciation would increase cost pressures on firms and fuel inflation expectations, which could require an abrupt tightening of monetary policy. On the upside, a faster recovery of major European trading partners would benefit growth, given the economy’s dependence on exports.

Maintaining policy support should depend on the strength of the recovery. Fiscal policy should remain supportive until the recovery is firmly underway. Once restrictions are lifted, the recovery will have ample support from the release of pent-up demand, suggesting that additional fiscal stimulus may not be needed to support demand. The withdrawal of state-backed emergency loans would help the efficient reallocation of resources to expanding sectors. Nonetheless, the government should maintain supportive fiscal policies in 2022 if supply-chain disruptions continue to restrain production or the recovery remains weak for other reasons. High labor taxes could be reduced further, financed by broadening the base for consumption taxes, further reducing tax evasion and raising environmental taxes. A strategy to decarbonize the economy is needed to secure environmental objectives. To boost growth potential and maintain fiscal sustainability, structural reforms to raise labour force participation and improve productivity should be accelerated. www.oecd.org