Hungary is a land-locked country in the heart of Europe. Blessed with extensive low-lying, fertile plains, the country's economy prior to World War II was primarily oriented toward agriculture and small-scale manufacturing. Hungary's strategic position in Europe and its relative lack of natural resources have also dictated a traditional reliance on foreign trade.
In 1968, Hungary was the first country in Central and Eastern Europe to initiate political and economic reforms by introducing the "New Economic Mechanism". By the late 1980s and early 1990s, fundamental laws on the banking system, foreign investments, the foundation of companies, trade, competition, labour, intellectual property and bankruptcy were laid down, while imports, prices and wages were liberalised.
Hungary was the first country in the region to launch market-based privatisation, including in strategic sectors such as energy and banking, and public sector reform of health and education. As a result, the number of foreign direct investments increased rapidly.
In 1996, the Hungarian currency became convertible and Hungary joined the OECD. By the end of the 1990s, the privatisation process was essentially complete. Less than 20% of state assets - mainly in strategic industries - remained in government control and Hungary was ready to join the European Union in May 2004.
Foreign ownership of and investment in Hungarian firms are widespread, with cumulative foreign direct investment totalling more than EUR 60 billion (USD 80 billion) since 1989. Foreign capital is attracted by skilled and relatively inexpensive labour, tax incentives, modern infrastructure and a good telecommunications system.
GDP growth in Hungary was driven by the expansion of exports and investments. Between 2001 and 2008, export growth was exceptionally high at 11.5% per annum and the structure of exports showed an upward trend. After 1998, the share of technology-intensive and high-value-added sectors such as machinery, transportation equipment and ICT products grew significantly.
From 2006, Hungary's economic development had slowed and GDP growth remained below 4% as fiscal consolidation became the focus of economic policy. The government's austerity programme has reduced Hungary's large budget deficit, but reforms have dampened domestic consumption, slowing GDP growth to less than 2% in 2007 and 0.6% in 2008.
Hungary is an open, export-driven economy. As a consequence, the global slowdown and faltering demand in its main export markets has had a negative impact on economic growth, especially in the export-orientated automotive and consumer electronics sectors.
In 2009, the Hungarian economy shrank by 6.3%. This was attributable to three factors: the slump in agricultural output following the sector's outstanding growth in 2008; the increasingly rapid decline in other sectors that began as early as 2008, and, finally, the continuing downturn in the construction sector that began two years ago (although at that stage, it was limited to only 5%).
In 2010 the new government implemented a number of changes including cutting business and personal income taxes, but imposed "crisis taxes" on financial institutions, energy and telecom companies, and retailers. The economy began to recover in 2010 with a big boost from exports, especially to Germany, and achieved a growth of approximately 1.4% in 2011.
Hungary’s progress reducing its deficit to under 3% of GDP led the European Commission in 2013 to permit Hungary for the first time since joining the EU in 2004 to exit the Excessive Deficit Procedure.
The OECD's Economic Survey 2014 stated that Hungary had exited from recession in early 2013, but forecast only a modest recovery. The report found that growth potential was held back by weak investment, low employment among low-skilled workers and shortcomings in labour and product markets, making further structural reforms essential.
In the second quarter, annual GDP growth reached a post-recession high of 3.9% before slowing to a still-robust 3.2% in the third quarter. More recent indicators send mixed signals, but overall they suggest that the economy lost further momentum in the final quarter of the year.
According to European Commission’s actual evaluation, Hungary is on a balanced, albeit still relatively moderate growth path, gradually reducing its macroeconomic imbalances. Real GDP has surpassed its pre-crisis peak and the growth potential has been gradually recovering. Nevertheless, Hungary's rate of potential growth remains a full percentage point lower than before the crisis, which was already comparatively low. In 2015, GDP is estimated to have increased by 2¾%, supported by strengthening private consumption and healthy export growth.
A decline in EU-funded investment is projected to slow growth in 2016, but continuing support from private consumption and a gradual recovery in EUfunded investment will see growth returning to levels slightly above potential in 2017. As the impact of lower energy prices fades, inflation is projected to revert to the central bank’s target rate by the end of 2017.
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