In a country report released on Wednesday, the European Commission (EC) said productivity increases in Hungary have been "modest," while acknowledging that strong economic growth has created favorable conditions for policies that would support improvements, state news agency MTI reported.
"Productivity growth has improved, but remains below pre-crisis rates, limiting the possibility for income convergence," the EC said in the report, as summarized by MTI.
"[Productivity growth] has been slow for a decade compared to Hungary’s regional peers," it continued. "Large productivity differences persist between larger, more capital-intensive foreign firms, and smaller, more labor-intensive domestic counterparts. Only few firms innovate, reflecting weaknesses in the entrepreneurial culture and product market competition."
The EC acknowledged that policy stimulus has supported productivity-enhancing investment, but noted that labor costs continue to outpace productivity growth.
"In the course of the last decade, the mobilization of labor market reserves has helped income per head catch up with the EU average, while output per worker has barely grown," the EC noted.
As labor reserves have diminished and the population of working age is set to decrease in the medium term, higher productivity is "essential if living standards are to be brought closer to the EU average," the report stressed.
The EC said Hungaryʼs economy is enjoying a "strong cyclical upswing," but warned that economic growth is set to level off after pent-up consumption unwinds.
"The external environment is also providing less support to export growth, while the major role played by the car industry creates a vulnerability to trade disputes and to regulatory and technological change," it added.
The EC report said a big increase in public investment is aggravating capacity shortages in construction, leading to cost overruns and project delays, and contributing to rapid house price increases.
The EC also observed in the report that Hungary has made "limited progress" overall to address 2018 country-specific recommendations. While it acknowledged "some progress" in reducing the complexity of the tax system, cutting the number of fostered workers and reducing the tax burden on pensioners who return to work, it said "limited progress" had been made in improving the public procurement framework, preventing high concentrations of Roma pupils in certain schools, and increasing some social transfers.
The EC added that "no progress" has been made to address recommendations on reinforcing the anti-corruption framework and strengthening prosecutorial efforts.
"The regulatory environment in services has not improved. The quality and transparency of decision making and social dialogue has not advanced," it added.
The EC described Hungaryʼs fiscal consolidation efforts as "insufficient," noting that the budget deficit - expected to peak at around 2% of GDP before improving "moderately" - is one of the highest in the EU. It added that Hungaryʼs state debt remains high for the countryʼs level of development.