Hungary needs structural reforms for stronger and more sustainable growth - OECD

Global GDP growth is projected at 3.1% in 2024 and 3.2% in 2025, little changed from the 3.1% in 2023. In February, the OECD forecasted global growth at 2.9% this year and 3.0% in 2025.

The OECD expects G20 growth rate to come in at 3.1% both this year and next, with the centre of gravity of global growth shifting to emerging regions. The OECD forecasts Hungary's growth at 2.1% this year and 2.8% next year. The government's new growth target is 2.5%, revised downwardly from 4.0%, while the 2.8% forecast compares with the official estimate of 4.1%.

The government announced a few weeks ago that, in addition to revising its budget this year, it would also adjust its macroeconomic forecast. It expects GDP growth of 2.5% this year, down from 4% previously, while next year the economy is expected to expand by 4.1%. In comparison, the OECD is more pessimistic than the Hungarian government.

India is projected to achieve the highest growth rate of 6.6% this year and next. Indonesia is expected to come in second with GDP growth of 5.1% this year and 5.2% in 2025. China, in third place, will grow by 4.9% this year and 4.5% in 2025. In February's forecast, the respective growth forecasts were 6.2 and 6.5% for India, 5.1 and 5.2% for Indonesia, and 4.7 and 4.2% for China.

US GDP growth is expected to fall to 1.8% next year from 2.6% this year. The euro area is expected to grow by 0.7% this year and 1.5% in 2025. Germany's gross domestic product is expected to expand by 0.2% this year and 1.1% in 2025. In its February forecast, the OECD put the US growth rate at 2.1% this year and 1.7% next year. The respective estimates were 0.6 and 1.3% for the euro area, and 0.3 and 1.1% for Germany.

Inflation to fall fast

Headline inflation fell rapidly in most economies during 2023, driven down by restrictive monetary policy settings, lower energy prices and continued easing of supply chain pressures.

Food price inflation also came down sharply in most countries, as good harvests for key crops such as wheat and corn saw prices fall rapidly from highs reached after the start of the war in Ukraine.

Core goods price inflation has generally fallen steadily, but services price inflation has been stickier, remaining well above pre-pandemic averages in most countries.

Inflation is generally projected to converge on central bank targets by the end of 2025 in most advanced economies, although it may remain above 2½ per cent in some smaller European economies (Figure 1.14).

Past declines in commodity prices will help to keep intermediate input cost increases and goods price inflation low this year despite higher shipping costs. The projected easing of unit cost growth will also reduce inflationary pressure, especially in service sectors. Inflation rates among the major emerging-market economies are expected to follow more disparate paths.

Very high initial inflation rates in Argentina and Türkiye are expected to come down over 2024-25 but remain in double digits at the end of this period. Inflation is projected to stay very low in China, and to gradually decline towards policy targets in most other economies.

Monetary policy should remain prudent to ensure durable disinflation

Monetary policy needs to remain prudent to ensure that underlying inflationary pressures are durably contained. Scope exists to start lowering nominal policy rates provided inflation continues to ease, but the policy stance should remain restrictive for some time. The pace and scale of policy rate reductions will be data dependent and may vary across countries depending on economic conditions. 

Governments face mounting fiscal challenges from rising debt and sizeable additional spending pressures from ageing populations, climate change mitigation and adaptation, defence and the need to finance new reforms.

Without action, future debt burdens will rise significantly. Few countries appear likely to achieve a sustained primary budget surplus in the near term, making it challenging to stabilise debt. Stronger efforts to contain spending, enhance revenues, and increase growth would improve debt sustainability and resilience, and preserve the resources needed to support climate and distributional goals.

Beyond the near term, the prospects for long-term growth and improvements in living standards appear modest. Stronger policy action is required to remove impediments to greater investment and employment, to enhance skills development and to intensify innovation.

Outlook for Hungary

Lower inflation and interest rates are expected to support private consumption and investment. In addition to risks related to international trade and global commodity prices, the main uncertainties for the Hungarian economy concern the pace of fiscal consolidation and the outcome of the negotiations about the delivery of EU funds, the OECD said.

Further fiscal consolidation is needed to rebuild fiscal space and strengthen public debt sustainability.

Reforming the public pension system will be key to contain the projected increase in ageing-related costs.

Productivity growth could be bolstered by strengthening competition in the energy, transport, professional services and telecommunication sectors. This, and a wider diffusion of digital skills, would accelerate the digitalisation of firms.

The OECD noted that Hungary is currently attracting significant foreign direct investment in the manufacturing sector, mainly in relation to electric mobility, and this will eventually boost export capacity. Nevertheless, it warned that exports are currently held back by the slow growth in EU trading partners, which account for 80% of Hungarian exports.

The monetary policy rate is projected to decline to 6-7% by mid-2024 and to stabilise at 5% in 2025. 

The OECD noted that fiscal consolidation is under way in Hungary. While the headline deficit increased marginally to 6.7% of GDP in 2023, the structural primary deficit declined by 2.8 percentage points of GDP.

A consolidation of similar magnitude is expected for 2024, driven by lower spending on energy subsidies due to lower energy prices, and a rebound in VAT receipts along with increasing private consumption.

It noted that hardly any improvement in the structural primary balance is expected for 2025. The projected decline in the headline deficit, from 4.5% of GDP in 2024 to 3.7% in 2025, is mainly related to the improving growth outlook.

Significant risks surround this projection, as fiscal objectives were substantially and repeatedly revised downwards in the last months, and the design of the energy price support scheme to households exposes public finances to fluctuations in global energy prices,

the OECD warned.

Beyond uncertainty about external demand and energy prices, the main risk to the economic outlook in Hungary is the timing of the release of EU funds which are conditional on rule-of-law reforms.

"Failing to reach an agreement on the complete delivery of those funds may curb investor confidence, increase the cost of capital, and put renewed pressure on the exchange rate. On the other hand, a full release of the EU funds would contribute to boost public investment," the OECD added.

It also recommends restructuring the system of residential utility bill reductions.

"Restructuring energy support by moving from price caps to targeted cash transfers for vulnerable households would increase incentives for energy savings and improvements to the energy efficiency of dwellings, reduce the exposure of the public finances to fluctuations in energy prices, and lower Hungary’s dependence on energy imports."

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