Hungary Economy Facts

by ebizdir · Published January 30, 2023 · Updated February 22, 2023

Economical overview

Today, Hungary’s economy is built around the service sector – which accounts for two-thirds of gross domestic product (GDP) and employs an equal share of the workforce – and industry that accounts for less than one-third of GDP. EU support has been an important driver of economic development. Foreign investors have been hesitant about uncertain legal conditions and corruption, but many large companies have set up manufacturing in Hungary.

In the past, having mainly supplied machinery, food and medicines to the Soviet Union, Hungary, after the fall of communism in 1989, invested in exporting consumer goods and a wider range of agricultural goods. From the mid-1990s, machinery, car parts and electronics, as well as the re-export of imported goods processed in the country, have dominated. Foreign trade plays an important role in the economy.

Countryaah.com: Major imports by Hungary, covering a full list of top products imported by the country and trade value for each product category.

In the early 1990s, parts of both the industry and the financial sector were sold to foreign stakeholders, opening international markets and providing access to foreign expertise. At the end of 1997, 50 percent of the assets of Hungarian banks were in foreign hands and in 2009 a full 81 percent.

During most of the 1990s and a few years into the 2000s, the country had steady growth, unemployment fell and tax revenues increased. But developments reversed and in 2008 GDP did not even grow by one percent. Unstable finances and dependence on foreign investment made Hungary vulnerable to the global financial crisis; the economy shrank in 2009 by a full 6.7 percent. Exports declined and the Hungarians could not afford to consume as before, as loans became more difficult and many lost their jobs.

From 2010, the Fidesz government decided to once again increase state ownership in the banking sector and also bought back some previously privatized state-owned companies in areas that were considered “strategic”.

Abbreviationfinder.org: Check this abbreviation website to find three letter ISO codes for all countries in the world, including HUN which represents the country of Hungary. Check findjobdescriptions to learn more about Hungary.

With the help of, among other things, a crisis loan from the IMF, the EU and the World Bank, the economy recovered helpfully. Growth remained low in 2010–2013, but from 2014 a sharp rise began, which was mainly driven by the increasing consumption of Hungarians. Despite the positive development, however, GDP per inhabitant has remained low, even compared to many other Eastern and Central European countries.

In 2012, Hungary turned to the IMF for talks on new loans, but negotiations were suspended when the government could not accept IMF demands to restore the central bank’s independence. The government had been criticized by, among other things, the EU for legislative changes that undermined the central bank’s ability to act independently. In 2013, Hungary repaid in advance what the country owed the IMF for the 2008 crisis loan.

Expensive support

Reducing the deficits in the state budget has been a challenge for the country’s governments. The deficits have arisen, among other things, as a result of high spending in the social sphere, which tended to increase as governments were anxious to get voter support and therefore invested in increased pensions, increases in the public sector and tax rebates for large families (see Calendar). Only a few months after the country’s entry into the EU in 2004, the Union placed Hungary under financial surveillance, as the budget deficit exceeded the allowable 3 percent of GDP. The central government budget had then been drawn with increasing deficits for several years.

The unwillingness to follow the IMF’s recommendations to reduce the budget deficit made straining Hungary’s contacts with international financial institutions. From 2012, however, Hungary managed to push down the deficit and it has subsequently remained below the EU border.

In connection with the financial crisis, many Hungarians were hit hard as interest rates rose on their mortgages denominated in foreign currency during the good years around the turn of the millennium. The loans had become more expensive as the value of the forint fell during the crisis years. In 2011, borrowers were allowed to repay their loans in forint at a rate that was significantly lower than the market rates and in 2014 they had to convert their loans in foreign currency to forint. The measures were rejected by many economic analysts, as well as by many other decisions by the Orbán government, including the nationalization of the equivalent of $ 13 billion in private pension funds that would be used to improve government finances and the introduction of a “flat” income tax, equal for all, of 16 percent. The low income tax, even for very wealthy Hungarians, has been described as a way for Prime Minister Orbán to secure their continued political support. The flat tax has also been granted constitutional status, which makes it very difficult for a future government to change it.

The government also increased VAT to as much as 27 percent and introduced special taxes for financial institutions, the energy and telecommunications sector, advertising and the consumer trade. However, the bank tax hit the financial sector hard and the government decided in the mid-2010s to gradually lower the tax to EU level until 2019. Two other controversial new laws in the mid-2010s forced banks to indemnify private borrowers’ debts and gave the government the right to decide on public spending without Parliament’s approval.

Growth has continued to be good – one reason is that EU support has enabled major construction projects, including upgrading of road and electricity networks. B rist of labor is also a factor that can disrupt the economy. Several elements of the Hungarian government’s policy, not least a fierce campaign against the financier and patron George Soros, also slow down the willingness to cooperate from abroad. However, this does not apply to interest from Russia, which has, among other things, been given a Hungarian order for nuclear power development.

Already in 1990 Germany took over Russia’s role as Hungary’s most important single trading partner and Germany still accounts for a large part of both exports and imports. German large companies are leading among those who have made investments in Hungary (see Industry). In 2018, 82 percent of Hungary’s exports to other EU countries went, and 75 percent of imports came from the EU. Outside the EU, in addition to Russia, China has also become an important trade contact.

Tourism is an important source of income, not least in foreign currency. A popular attraction is Budapest’s many thermal baths (swimming pools heated by hot springs) and spa facilities. Medical tourism, which means that foreign nationals come to Hungary for comparatively inexpensive surgeries, dental care, plastic surgery and more, is an increasingly large market. Lake Balaton is the main tourist destination for boating, swimming and fishing. In the Mátra Mountains in the north there are hiking trails and winter sports facilities.

There are over 130 km of navigable waterways including Lake Balaton and Tisza, but most of the boat traffic takes place on the Danube.