European Commission declares Hungary’s economic growth sustainable

Hungary’s economy has undergone a steady recovery since the 2008 financial crisis, offering a path to sustainable growth over the coming decade, the European Commission said in an annual report released on Wednesday.

Hungary’s vulnerability has significantly decreased and GDP growth has been helped by a supportive external environment and accommodative domestic policies, the EC said in the Country Report for Hungary.

Household consumption was boosted by double-digit wage growth, the EC said.

Investments have picked up thanks to the use of EU funds and export growth reflected global developments. Inflation in Hungary has risen and approached the central bank’s target.

The EC said employment in Hungary reached record highs. It attributed the rise to the overall economic upturn and effective policy measures. However, cross-border labour migration and adverse demographic trends lowered the labour supply, particularly among skilled workers.

The EU’s executive body added, at the same time, that Hungary’s gradually recovering growth potential “still remains moderate for a catching-up economy”.

It also warned that risks to a balanced growth path may start to emerge.

“High capacity utilisation suggests that the economy is now moving above potential. Particularly, labour supply may soon reach its limits, adding to the already considerable wage pressure,” the EC said.

It 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.

Hungary’s productivity growth has been slow for a decade compared to peer countries, and meeting this “pronounced” challenge is “becoming more pressing” because of the labour shortage, according to the report. The EC faulted Hungarian SMEs’ 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.