Strong growth in Hungary, overheating labor market

Hungarian economic development will remain strong in the coming years but there is a danger of labor market overheating, the Organisation for Economic Cooperation and Development (OECD) said in its latest country report released on January 31st.

"The economy is prospering. Growth is expected to rise even further, following a past strong performance. Domestic demand is fueled by strong private consumption, reflecting high real income gains, and dynamic business and housing investment," the report said.

In its short-term forecast the OECD expected a GDP growth of 3.9 percent this year and 3.3 percent in 2020 compared with a 4.6 percent growth last year. It also expects a relatively low inflation of 4 percent both for this year and 2020 compared with 3 percent in 2018. The Hungarian Central Bank's (MNB) inflation target is 3 percent and the OECD's recommendation to increase interest rates is in line with the MNB's recent hint that a tighter policy is coming.

The unemployment rate has fallen to a historically low level of 3.6 percent and as a consequence, labor shortages have emerged. This has been, accompanied by strong and broad-based wage increases, helping to preserve a high level of income equality, and restarting income convergence with the European Union.

Risks are both external and domestic, the OECD said. It pointed out that 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 OECD also said that despite a rising life expectancy pensioning age has remained unchanged. Its key recommendations in this area are to complete the ongoing increase of the statutory retirement age to 65 by 2022 and subsequently link it to gains in life expectancy as well to introduce a basic state pension to guarantee a minimum income for all pensioners.

The organization also recommends to encourage greater labor mobility and increase the skilled workforce so as to bring workers closer to economic centers. Another key goal is the development of local networks to integrate domestic firms into regional and national supply chains.

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