06/03/2024 – The Hungarian economy experienced a robust recovery post the COVID-19 pandemic, followed by a slight downturn leading to a mild recession. This downturn was primarily attributed to soaring inflation, which diminished the purchasing power of households, coupled with elevated interest rates and diminished confidence that hindered investment prospects, as per the latest report released today.
Presently, the economy has commenced its growth trajectory and is anticipated to bounce back from a decline of -0.9% in the previous year to 2.4% in 2024 and further to 2.8% in 2025. Inflation is projected to witness a significant decrease from 17.1% in 2023 to 3.9% in the ongoing year and a further decline to 3.4% by 2025. However, the speed of disinflation, future energy costs, and the receipt of EU funds contingent upon rule-of-law reforms pose potential risks to the economic outlook.
To enhance Hungary’s business vitality, fostering increased competition particularly in sectors like retail, energy, transportation, telecommunications, and professional services, along with additional reforms in the insolvency framework to facilitate the exit of unviable enterprises, are recommended. The recent noteworthy anti-corruption measures and enhancements in public integrity need to be fully enforced to align Hungary more closely with OECD standards, fortify the rule of law, and elevate investor trust.
Despite the relatively low poverty rate in Hungary standing at 12% compared to other OECD nations, improvements are advised in the targeting of social transfers towards the most financially vulnerable groups to enhance cost-effectiveness. Concurrently, challenges persist for Hungarians in advancing economically from one generation to the next. Implementing reforms to ensure equal opportunities in education by reallocating more public expenditure to schools catering to students from disadvantaged socio-economic backgrounds could potentially enhance income mobility. Moreover, facilitating access to quality childcare facilities for children under three years old, alongside offering more flexible work arrangements, could aid women in bridging existing wage and employment disparities.
In response to the inflationary pressures faced by Hungary, proactive measures undertaken by the central bank have effectively curbed inflation and stabilized the exchange rate. It is advised to sustain the gradual and moderate monetary easing pace initiated previously, while remaining vigilant against renewed inflationary threats, highlighted OECD Secretary-General Mathias Cormann during the Survey presentation alongside Hungary’s Finance Minister Mihály Varga. Addressing the fiscal deficit and public debt, enhancing productivity and business sector activities through streamlined regulations and heightened competition, and refining support mechanisms for vulnerable families are deemed essential to foster sustainable growth and prepare for forthcoming challenges related to demographic shifts and climate change.
Accelerating the adoption of renewable energy production is pivotal to curbing emissions and bolstering energy security. In addition to existing regulations promoting the green transition, there is a call for the progressive expansion of carbon pricing beyond the sectors covered by the EU Emissions Trading Scheme, which presently accounts for only 32% of emissions. A comprehensive climate strategy aimed at emission reduction should encompass restructuring energy subsidies, transitioning from price controls to targeted financial aid for supporting at-risk households. This approach, while safeguarding the most vulnerable, would incentivize energy conservation, enhance dwelling energy efficiency, and reduce the exposure of public finances to fluctuations in global energy prices.
While the current strategy emphasizes the expansion of nuclear and solar energy, there exists untapped potential in geothermal and wind energy sources, necessitating the removal of restrictive regulations hindering windmill installations. Given Hungary’s heavy reliance on energy imports, expedited development in renewables is imperative to fortify energy security, albeit requiring substantial investments in the electricity grid from both public and private sectors.