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Hungarian economy strong, but risks ahead - OECD

The Organisation for Economic Co-operation and Development (OECD) released a new report on the Hungarian economy today, noting that while the outlook looks strong, the labor market and regional inequalities remain significant risk factors, and suggesting that upskilling, mobility and stronger regional growth are key to securing equitable growth.

The OECDʼs survey projects growth in Hungary of 3.9% in 2019 and 3.3% in 2020, laying out an agenda for making the economy stronger, sustainable and more inclusive. It was presented in Budapest by Álvaro Pereira, director of country studies in the OECD Economics Department, and Gábor Gion, state secretary for financial affairs at the Hungarian Ministry of Finance.

"The Hungarian economy is growing at a rapid pace, with unprecedented levels of employment, unemployment at historic lows, and strong wage growth all contributing to a demand-led expansion," Pereira said. "This excellent performance is not without risks, notably as concerns growing inequality between Hungary’s regions. Ensuring long-term sustainability will require policies to create economic opportunities for all."

The OECD observes that there are marked regional differences in the country. While Budapest benefits from being a sizable agglomeration and the western and central parts of Hungary are the main targets of foreign investment, the rest lags behind due to low levels of employment, high levels of social transfer recipients, and poor integration into regional and national supply chains.

In order to tackle this issue, the survey suggests giving local authorities greater autonomy in executing projects beneficial to local economies, alongside better vocational education and training, with courses and curricula responding to the needs of the local labor market.

External risks

The document also reveals that Hungary could be vulnerable to external factors.

"Hungary is vulnerable to the escalation of international trade disputes, which could cause a shock to exports, and particularly to the important vehicle sector, and would undermine investors’ confidence," the report notes.

The organization notes that the labor market keeps on shifting towards higher-skilled employment.

"This reflects that over the past decades, the service sector has expanded and industry has moved from mining and heavy industries to higher value-added production that links into global value chains," the report says. "This has led to an increase in medium and high technological-intensive manufacturing, although manufacturing accounts for a smaller part of overall employment. Moreover, agriculture is characterized by very small farms, indicating considerable scope for growth-enhancing restructuring that would further reduce employment in that sector."

The OECD stresses that these changes are taking place as firms increasingly search for skilled workers. In order to sustain growth, therefore, it is becoming increasingly important to adjust and enhance skills, improve allocation of labor, and mobilize all underutilized labor resources, it adds.

Aging population

The OECD also calls attention to the issue of Hungaryʼs aging population, proposing raising the statutory retirement age to 65 by 2022, and linking further adjustments to gains in life expectancy. In addition, the survey suggests doing away with early retirement and introducing basic state pensions to guarantee a minimum income for all pensioners.

Regarding healthcare in the country, the organization points out the need for improved efficiency across the system, including a reduction in hospital stays through enhanced outpatient care, while concentrating inpatient care in fewer, but better-equipped and more specialized hospitals, as well as integrating various long-term care systems.

To make Hungarian growth greener, OECD says that road tolls and taxes need to take better account of vehicle environmental performance. For the improvement of urban air quality, the organization suggests congestion charges with better public transport, as well as fiscal incentives used to encourage the replacement of inefficient, emission heating systems.