This Survey is published on the responsibility of the Economic and Development Review Committee of the OECD, which is charged with the examination of the economic situation of member countries. 

Inflation is receding and growth has restarted in mid-2023. Fiscal policy should consolidate to curb inflation further and recreate fiscal space.

The last years have been characterised by severe macroeconomic challenges for Hungary, which put an end to a period of strong economic growth and improving public finances in the years preceding the COVID-19 pandemic. As the economy emerged from the pandemic, inflation rose to levels not seen in decades, initially on the grounds of international factors such as rising commodity prices and supply-chain bottlenecks and strong policy stimulus that stretched growth beyond its potential, later exacerbated by the economic fallout from Russia’s war of aggression against Ukraine. Against a backdrop of declining household real incomes, higher interest rates and weak investor confidence, domestic demand softened, leading to declining activity from mid-2022 onwards. At the same time, however, the labour market has proven surprisingly resilient (Figure 1.1).

A strong post-pandemic recovery, largely driven by domestic demand, lifted the economy above its potential in late 2021 and early 2022 (Figure 2.1). Since then, growth has shifted into reverse with four consecutive quarters of falling GDP. High inflation has curtailed the purchasing power of households and weighed on private consumption, while private investment has been held back by higher interest rates and lower confidence. Public investment has decreased but public consumption has remained supportive. External demand has also supported growth, although mainly related to lower imports in the face of falling domestic demand.

Productivity growth is key to sustain living standards, especially in a context where the working-age population share is declining due to ageing. Labour productivity growth in Hungary has resumed only recently after a decade of decline, but it remains lower than before the Great Financial Crisis. Boosting productivity will necessitate lifting barriers to entry for new businesses and fostering competition, especially in network sectors such as energy, transport, and telecommunication. Strengthening the insolvency framework and advancing the digitalisation of firms will also be key. Despite a good internet infrastructure, Hungarian firms are lagging behind OECD peers in the adoption of advanced digital technologies, and the digital divide between small and large firms has increased during the pandemic. Lower telecommunication prices and a wider diffusion of digital skills in the population would help improve the situation. Recent reforms to the anti-corruption and public integrity framework will also support the business environment if they are fully implemented.

Income inequalities and the risk of poverty are limited in Hungary. This is largely related to existing social transfers. Nevertheless, there is room to achieve the same result in a more cost-effective way by improving the targeting of those transfers. At the same time, inequalities of opportunities are a substantial issue. Women face significant employment and pay gaps compared to men. Moreover, social mobility from one generation to the next is limited, which is related to the education system. Public education spending is low in international comparison and students’ achievements are closely related to their socio-economic background. The COVID-19 pandemic also revealed weaknesses in the social protection of workers. Addressing them would require devising a permanent short-time work scheme that could be activated rapidly during recessions, as well as relaxing eligibility conditions for unemployment benefits and extending their duration, at least during recessions.

Hungary’s green transition has made progress but will need to accelerate to reach emission reduction targets. For a large part, emission reductions achieved so far are related to structural shifts induced by the transition to a market economy in the early 1990s. Regulations and standards are currently the main tools used to support the green transition, but they will likely be insufficient to reach the 2030 and 2050 emission targets. Price signals are key for an efficient decarbonisation, but the EU’s Emission Trading Scheme only covers a third of emissions. Energy price caps have curbed incentives for energy saving and energy efficiency improvements, which contributes to high residential emissions. An aged vehicle stock, low fuel duties and urban sprawl are pushing up transportation emissions. The green transition will require a significant increase in electricity supply from low-carbon sources and massive investments in the electricity grid.