You don’t have to be an avid student of EU politics to know that Brussels has a lot of negative things to say about Hungary. This is not the place to recap all the instances of Eurocratic magyarophobia; suffice it to say that none of the criticism is merited. If anything, the critics of Budapest have helped prove that Hungary is a much more reliable harbor of democracy than the hallowed hallways of the European Union.
Hungary deserves respect, not critique, and that respect should stretch beyond more traditional issues such as education and social values. It is often forgotten in the debate over Hungary that since Viktor Orbán became prime minister, his country has had one of the strongest economies in Europe.
While the economies of Germany and France have been sputtering and stumbling, Hungary has continued to set an example of economic prowess and strength that much of the rest of Europe would be wise to follow.
That is not to say all is well in Budapest. Naturally, Hungary is also facing a recession; the remarkable aspect of it, though, is that the Hungarian economy seems to already be ready for the recovery phase. With its GDP shrinking (in real terms) in the first three quarters of 2023, Hungary may actually be on the tail end of its economic downturn.
It is too early to conclude this definitively, but the pattern in the negative GDP numbers actually does open for that possibility:
- -0.9% in the first quarter of 2023;
- -2.4% in the second quarter; and
- -0.4% in the third quarter.
It is possible that the Hungarian economy hit its recessionary bottom in the second quarter. The numbers for private consumption speak the same language:
- -4.3% in the first quarter of 2023;
- -3.4% in the second quarter; and
- -2.2% in the third quarter.
This pattern of a ‘shrinking’ decline is always relevant when we talk about an economic recession. It is especially important when we are looking at private consumption, which accounts for half of all absorption in the Hungarian economy.
There is a possibility that private consumption bottomed out in the fourth quarter; we will not have those numbers for another month, but if this is in fact what happened, we can expect the Hungarian economy to start growing again in the first quarter of the new year.
One of the wild cards in predicting the Hungarian economy is its relatively high dependency on exports. In recent years, gross exports—before we deduct imports—have been as large as 80-90% of the Hungarian GDP (measured in fixed prices). This means that for every 100 forints in consumer spending, private businesses export products worth 191 forints.
Unsurprisingly, Hungary also imports goods and services for significant amounts of money; according to the latest numbers from Eurostat, approximately 92% of export revenue is technically turned around to pay for imports. This means that the Hungarian export industry imports a lot of inputs for their production, but it also means that Hungary thrives by participating in international, and primarily European, trade.
The trick to running a country’s economic policy to stimulate foreign trade is to make sure that this policy does not inadvertently suppress the domestic sector of the economy. One common side effect is a weakening currency. This has been a problem for Hungary, but after many years with its currency slowly weakening vs. the euro, 2023 marked the year when the forint strengthened its value against the euro:
- In November 2022, Hungarians paid HUF406.16 per euro;
- In November 2023, the exchange rate had improved to HUF379.19 per euro.
As I pointed out a year ago, the weakening of the forint over a number of years had opened the economy to imported inflation. I made those points when Hungary was suffering from 25% annual inflation; the 6.6% strengthening of the forint that has taken place since then has evidently helped reduce the inflation rate. According to Eurostat’s consumer price index numbers, in November the Hungarian inflation rate was down to 7.7%.
This is a brisk-paced journey back toward price stability. Obviously, inflation near 8% is not price stability per se, but with this trend continuing into 2024, Hungary could very well have eradicated inflation by the end of the summer.
In practice, I doubt that this will happen—a more realistic outlook is a stable inflation rate of 3-4% per year. The reason for this is that the Hungarian economy, while dynamic and very productive, also operates near the capacity ceiling of its workforce. Since late 2016, the Hungarian unemployment rate has consistently remained below 5%, and for long stretches of time fallen below 4%.
Its current level of 4.1% (third quarter of 2023) is actually at the higher end of where Hungarian unemployment has been since the 2020 pandemic. However, the level appears to be stable—there has not been much movement in it in the last year. If my prediction is correct regarding private consumption, i.e., that it will bottom out in the fourth quarter and rise again in the new year, unemployment will not move much at all above its current level.
The enduring success of the Hungarian economy manifests itself in another way: workforce participation. As of the third quarter of 2023, Hungary is one of only eight EU member states where more than 80% of the population participates in the workforce (with the latter measured as the 20-64 age demographic). It is difficult to raise workforce participation much higher than the current 80.8% level; it can be done with major investments in workforce training, but if those investments are paid for with tax money, it is reasonable to ask what the marginal benefit is to the economy.
One of the many reasons why Hungary is an economic powerhouse is its prudent tax policy. After an initial period of economic success in the early 2000s, the Hungarian parliament let the tax burden rise on the private sector. From 2006 through 2009, total tax collections increased from 41.2% of GDP to 46.2%. A new, conservative government began transforming the economy and the country, though the tax-to-GDP ratio kept creeping up and exceeded 48% in 2015. With a transformative tax reform in 2016, the Fidesz-led government gradually pushed the tax burden back down again.
Most recently, the ratio has remained stable in the 42-43% range.
Overall, the Hungarian economy remains one of the strongest in Europe. The government in Budapest has navigated the economic challenges of the past 10+ years with patience, foresight, and due reliance on both economic experience and economic theory. They deserve much more recognition for this than they get; rather than finding reasons to complain about Hungary, other European countries—and especially the Eurocrats in Brussels—ought to pay Budapest a visit and learn from their success.
