Hungary is located in Central Europe and has a population of 9.75 million people.  The per capita income is roughly two-thirds of the EU-28 average. Hungary is a member of the OECD (1996), NATO (1999), the European Union (2004), and the Schengen Zone (2007) and 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.  There are more than 400 wholly owned U.S. companies in the country, and 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 and after South Korea in terms of capital invested.

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 USD 98 billion 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.

Hungary saw a decline in exports and financial aid from the former Soviet Union following the fall of communism in 1989. To transition from a centrally planned to a market-driven economy and reorient its economy toward commerce with the West, Hungary embarked on a series of economic reforms in the 1990’s, including privatization of state-owned firms and reductions in social spending programs. These initiatives aided in the acceleration of growth, the attracting of investment, and the reduction of Hungary’s debt and fiscal deficits. Despite these reforms, the typical Hungarian’s living situation deteriorated at first as inflation rose and unemployment reached double digits. As the reforms took hold and export growth accelerated by the end of the decade, conditions gradually improved. Hungary was better positioned to join the European Union in 2004 as a result of economic initiatives implemented. Despite an EU requirement, Hungary is still not a member of the Eurozone and has not set a target date. Hungary’s economy was also hit by the 2008-09 financial crisis, as export demand and domestic consumption fell, causing it to seek financial assistance from the IMF and the EU.

Since 2010, the Fidesz-led administration has reversed several economic reforms and adopted a populist approach to economic management. Through legislation, regulation, and public procurements, the government has supported national industries and government-linked firms. Hungary nationalized private pension funds in 2011 and 2014, which pushed financial service providers out of the system but also helped Hungary reduce its public debt and reduce its budget deficit to below 3% of GDP, as subsequent pension contributions were channeled into the state-managed pension fund. Increased EU funding, greater EU demand for Hungarian exports, and a resurgence in domestic household consumption have all contributed to strong real GDP growth in recent years. To boost household consumption even more ahead of the 2018 election, the government implemented a six-year phased increase in minimum wages and public sector salaries, reduced taxes on foodstuffs and services, lowered the personal income tax rate from 16 % to 15 %, and implemented a uniform 9 % business tax for small and medium-sized enterprises and large corporations. At the end of 2021 and before the national elections in April 2022, the government raised the minimum wage by 20% and implemented measures which boosted households’ income.  As a result of public investments as well as an increase in domestic income, Hungary’s economy grew by 7.1% and its budget deficit amounted to 6.8% of GDP from the end of 2021 till the election of 2022. Hungary’s state debt (at 77.3% of GDP in 2022) remains high in comparison to EU Central European rivals. Pervasive corruption, labor shortages caused by demographic reductions and migration, severe poverty in rural regions, vulnerability to changes in export demand, and a high reliance on Russian energy imports are all systemic economic issues. The World Factbook (CIA).

Economy

The government projected that GDP would grow by 4.5% in 2022 and 4.1% in 2023; this is reflected in the 2023 budget bill which anticipated a slowdown compared to 2021. The main engine of growth will be domestic demand.

The rate of inflation was 3.4% in 2019, 3.3% in 2020 and 5.1% in 2021.  Fluctuations in the exchange rate of the Hungarian Forint to other currencies make planning very difficult. Much of the population was indebted in foreign currencies (mainly EUR and Swiss Franc), so the weakening of the Forint also significantly raised the burden of debtors, including households, the business sector, as well as the government. 

Pressure to raise wages, combined with high food and energy prices, will keep headline inflation high in 2022. The government projected 8.9 % inflation in 2022, lower than the Central Bank’s 13-14% expectation by the end of this year.

Both the government and the Central Bank expect inflation to gradually decline in 2023, reflecting a slowing of domestic demand. Analysts note a key risk is that a combination of higher wage growth and persistently high energy prices would continue to de-anchor inflation expectations.

The Central Bank has embarked on monetary tightening to keep inflation expectations in check and noted that a more rapid fiscal consolidation would be required. As of 2021, Hungary’s current account has turned negative and posted a deficit of $5.2 billion (4.7 billion Euro).  The government expects this to increase to 9.5 billion Euro in 2022.  Hungary’s domestic currency, the Forint, has also weakened by about 20% to major currencies and is about 400 to the USD and 402 to the Euro as of DATE.  The weaker forint supports export industries, but analysts note rises in productivity, innovation, and technological improvement, as well as structural improvement could sustainably raise competitiveness.

Additional labor tax cuts could help address labor shortages, but they would have to be paid by reduced spending and a greater dependence on consumption and property taxes.

Economic headwinds are becoming stronger.

Domestic demand fueled a strong rebound as Hungary emerged from the COVID-19 pandemic, but the surge is now jeopardized by the conflict in Ukraine. As the employment rate reached a historic high of 74.1% and the unemployment rate fell to 3.6% in the first half of 2022, Hungary began to face a labor shortage. Wages in the private sector have increased by over 10%, owing in part to a 20% increase in the minimum wage in January 2022.

In June 2022, headline inflation hit a 20-year high of 11.7%. Domestic pricing pressures have been building since mid-2021, in addition to global issues such as supply chain disruptions and rising food and energy prices. The government lowered employers’ pension and health care contributions to offset the impact of minimum wage hikes. The government has also set price caps for fuel and selected food items, in addition to setting households’ energy prices below the market price.  As of August, this lower price applies up to a government-determined energy consumption, above which market price has to be paid.

The conflict in Ukraine is a significant impediment to economic growth. Although direct trade with Russia and Ukraine is small (approximately 3% of total exports), the war has wreaked havoc on global and regional supply chains, exacerbating supply-side bottlenecks in the automotive industry. Since the start of the war, the forint has lost 10% of its value against the euro. Furthermore, Hungary is heavily reliant on Russian energy imports, which account for around 95% of its gas and 45% of its oil and petroleum. Consumer and corporate confidence began to drop at the start of the conflict. By the end of April, almost half a million Ukrainian refugees (equivalent to about 5% of the Hungarian population) had arrived as a result of the violence. These migrants could influence the labor market, as around one tenth of the new immigrants (or 50,000 people) are likely to accept work in sectors where there are labor shortages, such as agriculture and health.

The U.S. Department of Treasury announced its intention to terminate the Double Taxation Treaty with Hungary.  The Double Taxation Treaty has been in effect since 1979. 

The termination is expected to take effect on January 8, 2023, except for taxes withheld at the source and other taxes, for which it will have effect on or after January 1, 2024.

Expansionary fiscal policy has facilitated growth.

In early 2022, the government continued its expansionary fiscal policy, raising the minimum wage by 20% and lowering employers’ social security contributions from 15.5% to 13% and eliminating their 1.5% contribution to training. Families with dependents received a personal income tax refund, while retirees earned a 13th-month pension; pensions were increased by a total of 8.9% until July. These measures pushed the budget deficit to 85% of the total annual target by July, leading to fiscal tightening including freezing of certain expenditures, delaying projects, and raising revenues by imposing “windfall taxes” on eight sectors and reducing eligibility for the SMEs’ simplified tax system.  The measures were designed to keep the 2022 deficit at 4.9% of GDP.

Hungary’s Central Bank has increased its base rate in numerous steps from 0.6% in July 2021 to 11.5% in July 2022 and the one-week deposit rate from 0.9% to 9.75% in the same period. It indicated that it would keep raising the base rate on a monthly basis as long as headline inflation remained above the target of 3% with a tolerance band of +/-1%.

The main engine of growth will be domestic demand.

Due to the war in Ukraine, Hungary’s strong post-pandemic recovery is expected to slow. In the short term, the conflict will exacerbate already high inflation by driving up fuel and food costs and putting downward pressure on private consumption and investment. Nonetheless, due to the tight labor market, private consumption will benefit from additional gains in real incomes. In 2022 and 2023, higher food and energy prices, as well as significant wage growth in private and some public sectors including law enforcement and other defense forces are likely to feed into headline inflation. Inflation is expected to slow in 2023, owing to stricter fiscal and monetary policies that would restrict domestic demand growth. Even faster wage growth, along with high food and energy prices, might increase demand pressures and feed rising inflation expectations. The growth of private and public investment will be aided by significant homebuilding subsidies and domestic and foreign direct investment.  The government also hopes to unlock EU funds because of an ongoing dialogue with the European Union. A restriction on Russian gas imports is another significant risk. On the plus side, a shorter-than-expected conflict in Ukraine might relieve price pressures and boost the economy.

Expectations of inflation must be kept in check through policy.

To keep inflation expectations in check, the Central Bank is likely to continue monetary tightening. The government has lowered its 2023 deficit target by 140 percentage points to 3.5%, moving towards fiscal consolidation. Energy price limits might increase the state’s contingent liabilities by about 1% of GDP by 2022. Direct income support to households most vulnerable to high energy costs would be a better-targeted strategy. Cuts in government spending elsewhere should be used to fund such assistance. Hungary Economic Snapshot - OECD

Political & Economic Environment:  State Department’s website for background on the country’s political environment