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EC warns against overheating of Hungaryʼs economy

The European Commission acknowledged Hungaryʼs expanding economy, but warned that risks to a balanced growth path may start to emerge, in an annual report released on Wednesday summarized by Hungarian news agency MTI.

"High capacity utilization suggests that the economy is now moving above potential. Particularly, labor supply may soon reach its limits, adding to the already considerable wage pressure," the EC said in its latest Country Report Hungary. 

The EUʼs executive body conceded, however, that domestic demand, in real terms, only reached the pre-crisis level in 2017, and that real home prices remained below pre-crisis levels. It added that Hungaryʼs gradually recovering growth potential "still remains moderate for a catching-up economy."

Hungaryʼs productivity growth has been slow for a decade compared to peer countries, and meeting this "pronounced" challenge is "becoming more pressing" because of the labor shortage, according to the report. The EC faulted Hungarian SMEsʼ low propensity to innovate, moderate use of digital technologies, regulatory barriers in services and retail trade, and unpredictability of regulation.

"Institutional weaknesses and human capital inadequacies also constrain productivity growth," it added.

The EC said the complexity of Hungaryʼs tax system, together with sectoral taxes, "remains a weakness," and added that payroll tax cuts pose medium-term fiscal risks.

Addressing Hungarian schools, the EC said education outcomes in basic skills are "significantly below" the EU average and that the impact of socioeconomic background on education outcomes is "among the highest in the EU."

The EC warned that "weaknesses in institutional soundness and governance could weigh on the countryʼs economic convergence," noting that "limited transparency and quality of policy making is a source of uncertainty for investors."

Social dialogue structures and processes remain "underdeveloped," according to the EC, and Hungary "performs weakly" in terms of the accessibility and quality of public information. 

The report acknowledged "important measures" taken with regard to public procurement, but stressed that scope remains to further improve transparency and competition in the tendering process.     

The EC publishes annual analyses of the economic and social situation in member states, including progress in implementing country-specific recommendations and an assessment of possible imbalances.