Hungary - Economy
Instead of a flying start, By June 2025 the Hungarian economy was stalling, and achieving one percent GDP growth in 2025 woulld be a challenge. It is no exaggeration to say that both the 2025 and 2026 budgets are a collection of empty promises and commitments. The Hungarian economy can grow by a maximum of 0.8-1 percent in 2025. According to analysts, this can only be achieved if the so-called negative risks, such as global economic events that also affect the Hungarian economy and further currency depreciation, do not occur. Meanwhile, yesterday, the Organization for Economic Cooperation and Development, the OECD, also came up with its latest forecast, according to which the Hungarian economy can grow by 0.9 percent this year and by 2.4 percent in 2026.
In other words, the forecasts are very far from the government's numbers: this year's budget was planned for economic growth of 3.4 percent, but the government has already realized that there is no chance of this, so it was reduced to 2.5 percent, and for 2026, 4.1 percent is planned. It is no exaggeration to say that both the 2025 and next year's budgets are a collection of empty promises and commitments.
Prime Minister Viktor Orbán promised his supporters a flying start at the beginning of 2025, but according to the first quarter data of the Central Statistical Office, the Hungarian economy stagnated, and the value of the gross domestic product (GDP) decreased by 0.4 percent when adjusted for the working day effect. Compared to the previous quarter – i.e. the last three months of 2024 – GDP decreased by 0.2 percent. The Hungarian economy has been unable to get on a growth path since mid-2022 – i.e. since the last elections – because since then the so-called real GDP, adjusted for inflation, has remained practically unchanged.
Investments had shrunk ten times in the past 13 quarters, and it was no different at the beginning of 2025. With such a duality (i.e. weakening consumption and the continuing collapse of investment), it is not surprising that domestic demand has restrained the performance of the economy. Looking ahead, the obstacle to the growth of the Hungarian economy will continue to be weak business and consumer confidence. The unpredictable external situation is holding back investment activity, while the slowly deteriorating labor market and high inflation are encouraging savings and not consumption. Government interventions are so far ineffective in stimulating business and consumer confidence, and can even be called counterproductive, as they create further uncertainty. The public consumption that is picking up before the elections may bring some positives, but in the absence of this, the overall structural picture is getting weaker.
Hungary's high-quality infrastructure, labor force, and central location are often cited as features that make it an attractive destination for investment. Despite these advantages, some businesses complain that obstacles to investment remain. These include a persistent lack of transparency and predictability, reports of corruption (particularly in government procurement and construction) and excessive red tape. In 2014, Parliament approved a series of new taxes levied on specific sectors and targeting mostly foreign businesses while at the same time favoring Hungarian companies.
There is a massive shortage of labor in Hungary as a result of the large number of people leaving the country, which was largely a result of the frustration of many Hungarians with Victor Orban's policies. Over the eight years from 2010 to 2018, some 600,000 mostly well-educated citizens have migrated from Hungary because of the oppressive political climate, the poor organization and underfunding of some parts of the education and health care systems, and the high dependence of private companies on government support. Now the government apparently wants to combat the massive labor shortage simply by increasing overtime. In December 2018 thousands of Hungarians began protesting against the Orban government's policies, in a wave of protests the likes of which Hungary had not experienced in a long time. The wave of protests was triggered by an amendment to Hungarian labor law, now known to the public as the "slave law". The law increases the possible number of overtime hours per year per employee from 250 to 400. At the same time, employers can now take three years instead of one year to pay overtime. The amendment put major social problems — which Orban's system had created in the first place — on the shoulders on workers, and doing so in a brazen way that many considered humiliating.
Hungary has achieved several years of strong growth. This expansion has been largely supported by accelerated absorption of EU funds and strong disposable income. External debt declined substantially over the past few years and so did public debt, albeit at a much slower pace. The increase in domestic demand has been reflected in a moderation in the external current account surplus from its 2016 record level, and the exchange rate has recently depreciated. Headline inflation has started to pick up, mainly due to higher energy prices, while core inflation has been running sideways over the past six months, despite emerging capacity constraints. Unemployment remained on a decreasing trend and labor shortages are intensifying despite the improvement in participation rates.
The 2017 general government fiscal deficit narrowed to 2 percent of GDP, compared to the budgeted 2.4 percent. This outcome was mostly driven by strong GDP growth and reduced interest payments. The structural primary balance, on the other hand, deteriorated by about 1.2 percent of potential GDP. Staff projects the 2018 overall fiscal deficit at about 2.4 percent of GDP, in line with the budget’s target. In view of the strong cyclical position, the structural primary balance is expected to deteriorate by close to one percent of potential GDP.
The Magyar Nemzeti Bank (MNB) further relaxed its monetary stance during 2017 and in early 2018, mostly with the help of unconventional tools. Imported inflation has been low and large wage increases have thus far been mitigated by lowering social security contributions. The MNB intends to let the Market-Based Lending Scheme expire by end-2018, as originally scheduled.
GDP growth was expected to be around 4 percent in 2018, similar to last year. In 2019, growth will start to decelerate, as the absorption of EU funds tapers off and capacity constraints tighten further, while inflation is projected to slightly exceed the MNB’s 3 percent inflation target. Improving productivity through structural reforms is key to achieving convergence and higher living standards.
Prior to World War II, the Hungarian economy was primarily oriented toward agriculture and small-scale manufacturing. Hungary's strategic position in Europe and its relative lack of natural resources dictated a traditional reliance on foreign trade. In the early 1950s, the communist government forced rapid industrialization following the standard Stalinist pattern in an effort to encourage a more self-sufficient economy. Most economic activity was conducted by state farms and state-owned enterprises or cooperatives. In 1968, Stalinist self-sufficiency was replaced by the "New Economic Mechanism," which gave limited freedom to the workings of the market, reopened Hungary to foreign trade, and allowed a limited number of small businesses to operate in the services sector.
Although Hungary enjoyed one of the most liberal and economically advanced economies of the former Eastern Bloc, both agriculture and industry began to suffer from a lack of investment in the 1970s. Belated reaction to the economic crisis of the early 1970s and deteriorating terms of trade resulted in increasing indebtedness. In response, the Hungarian Government launched a restrictive economic policy in the late 1970s and early 1980s, followed by the "Dynamization Program of 1985," which increased consumer subsidies and investments--mainly in unprofitable state enterprises--eventually leading to a doubling of foreign debt levels. By 1993, Hungary's net foreign debt rose significantly--from $1 billion in 1973 to $15 billion. Liberalization of the economy continued, however, and in 1988-89 Hungary passed a joint venture law, adopted tax legislation, and joined the International Monetary Fund (IMF) and the World Bank. By 1988, Hungary developed a two-tier banking system and enacted significant corporate legislation which paved the way for the ambitious market-oriented reforms of the post-communist years.
The Antall government of 1990-94 began market reforms with price and trade liberation measures, a revamped tax system, and a nascent market-based banking system. As a result of the collapse of Eastern markets and the inability of state-owned companies to compete with foreign competitors, industrial production fell by 50% between 1989 and 1994, and the country faced high unemployment and inflation rates, as well as a deteriorating trade balance. By 1994, the costs of government overspending and hesitant privatization had become clearly visible. In 1996, austerity measures referred to as the "Bokros package" (for then-Finance Minister Lajos Bokros) improved both the fiscal and external balance situation, and increased investor confidence. Simplified and accelerated privatization led to significant inflow of foreign capital in industry, energy, and telecommunications sectors, and a number of greenfield investments were launched. Hungary's early openness to foreign direct investment (FDI) led to a sustained period of high growth and made Hungary a magnet for FDI in the late 1990s and early parts of this century.
In 1995, Hungary's currency--the forint (HUF)--became convertible for all current account transactions, and subsequent to Organization for Economic Cooperation and Development (OECD) membership in 1996, for almost all capital account transactions as well. In 2001, the Orban government lifted remaining currency controls and broadened the band around the exchange rate, allowing the forint to appreciate by more than 12% in a year. Trade with European Union (EU) and OECD countries now comprises over 75% and 85% of Hungary's total trade, respectively. Germany is Hungary's most important trading partner, followed by Italy and France. The United States became Hungary's sixth-largest export market, while Hungary is ranked as the 72nd-largest export market for the United States. Bilateral trade between the two countries increased to more than $1 billion per year.
With more than $60 billion in FDI since 1989, Hungary had been a leading destination for FDI in central and eastern Europe, although this level is beginning to decline. The largest U.S. investors include GE, Alcoa, General Motors, Coca-Cola, Ford, IBM, and PepsiCo. As a result of extensive and continuing liberalization, the private sector produces about 80% of Hungary's output.
Close relationship with the economies of the EU helped pave the way for Hungary's EU accession in 2004. As part of its EU membership agreement, Hungary agreed to meet the economic criteria necessary to adopt the euro. In 2005 and 2006, however, it became clear that not only was a high budget deficit hurting the economy (nearly surpassing 10% of GDP in 2006), but that Hungary was moving away from meeting euro entry requirements, and would be subject to EU excessive deficit procedures. Against this backdrop, in fall 2006, Prime Minister Gyurcsany launched a program of fiscal consolidation by raising taxes, decreasing subsidies, and streamlining the public sector. Businesses have complained, however, that increased taxes, particularly on labor, have decreased Hungary's economic competitiveness compared to other countries in the region. Greater fiscal discipline allowed the government to reduce its deficit to 3.4% of GDP by 2008, but decreasing government spending during this period also reduced domestic consumption and contributed to a decrease in Hungary's GDP growth.
In October 2008, the effects of the global financial crisis spilled over into Hungary. Despite its success in reducing its fiscal deficit, years of high budget deficits and Hungary's high external debt levels fueled investor risk aversion, and negatively affected the foreign exchange, government securities, and equity markets in Hungary. The country was hit hard by global de-leveraging, and weak demand for government bonds. A sharp decline in the share of non-resident investors in the government securities market raised concerns that Hungary would be unable to meet its external financing requirements. In order to increase investor confidence and ensure liquidity in domestic financial markets, Hungary concluded a $25 billion financial stabilization package with the IMF, EU, and World Bank in November 2008.
Under the agreement, Hungary committed to further fiscal consolidation, financial sector reforms, and enacting banking sector support measures. Terms also include periodic assessment of macroeconomic and fiscal targets. The second review under the agreement took place in May 2009. Taking into consideration the worsening global economic and financial crisis, the IMF and the EU revised their projections of Hungary's GDP decline in 2009 to minus 6.7%, and agreed to increasing the 2.9% deficit target to 3.9% for 2009. Public debt is expected to increase to 83% of GDP in 2009 before fiscal tightening returns it to more sustainable levels. The government bond market had yet to fully recover, although the Hungarian Debt Management Agency (AKK) successfully re-launched regular bond auctions in spring 2009.
To respond to the crisis, the Bajnai government enacted a series of economic reforms and spending cuts intended to reduce the tax burden on labor, encourage employment, improve Hungary's economic competitiveness, and offset lost government revenue due to the deeper-than-expected recession. These measures include reforms to the pension and entitlement systems, as well as tax changes to shift the tax burden from labor to wealth and consumption. In addition to cuts in taxes for businesses and employees, tax changes include raising the value added tax (VAT), and a proposal for the introduction of a property tax.
Elected in 2010, the Orban government adopted what Economy Minister Matolcsy described as an "unorthodox economic policy" to help steer Hungary through the economic crisis. This included the introduction of “crisis taxes” targeting banking, energy, telecommunications, and retail sectors. Originally unveiled as 3-year, limited-duration, and extraordinary measures, the crisis taxes were meant to shore up the government budget until more long-term, structural changes were made. In November 2010, the government acknowledged that the “crisis taxes” would exist in some form until 2014, 2 years later than previously discussed. In addition, in 2010 the government discontinued contributions to the voluntary private pillar of the pension system, and imposed financial disincentives on those who chose not to return to the state system. The government intends to use the resulting budgetary windfall to help reduce the country's debt levels and meet its deficit target of less than 3% for 2011 and 2012.
In March 2011, the government launched its Szell Kalman Plan, which outlines structural reform plans in the areas of local government finance, education, healthcare, employment, and public transportation for 2011-2014. The government was developing more detailed reform implementation plans in each of these areas. Initial market reaction to the plan was positive, and by May 2011, the country had already met its foreign currency financing requirements for 2011 through two large dollar and euro bond issuances.
In 2013, Prime Minister Viktor Orban took on the foreign-owned energy giants with his government imposing cuts of over 20% on bills. Neoliberals expressed their outrage at such “interventionist” policies, but under Orban, the economy improved. Although it’s true that many still look back nostalgically to the days of “goulash communism” in the 1970s and 80s when there were jobs for all and food on the table for everyone. Unemployment fell to 7.4 percent in the third-quarter of 2014; it was around 11 percent when Fidesz took power, while real wages rose by 2.9 percent in the year up to July 2014.
The economyshowed signs of recovery – after GDP fell 1.7 percent in 2012, it grew 1.5 percent in 2013, 3.6 percent in 2014 and is expected to grow 2.5 percent in 2015. The government also reduced its fiscal deficit below 3 percent of GDP, which allowed Hungary to exit the EU’s Excessive Deficit Procedure (EDP) in 2013, while also paying off its debts to the IMF ahead of schedule.
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