Minister for National Economy Márton Nagy: The pace of growth regarding wages in real terms is to accelerate this year

A happier and more successful year to come: In 2024, we must focus on the internal economy

When we wish the Hungarian people a happy new year rich in success, we don’t just vocalise wishes based on mere hopes, but we envisage a fairly likely scenario, one that is based on analysis. A positive vision of the future which the Hungarian economy is able to achieve by relying on its own strength – provided that, unlike in years past, no further, even more serious, world-shattering disasters strike. The government takes the view that the Hungarian economy’s capacity for growth and the directions it is pursuing are more than adequate, and if we manage to avoid the potholes on the path ahead, then the speed of our growth could be significant. In 2024 in the economy we can expect a happier and more successful year.

2023 was a year of struggle against the impacts of the war and the flawed sanctions, but as the prime minister stated, it was especially a year of fighting inflation. We began last year by envisaging high inflation, and in consequence, a decline in investment and consumption. Factors eroding our growth towered over us almost exclusively. In a long struggle, we have eventually defeated one of the chief obstacles posing a threat to growth, the phantom of inflation, and so we have succeeded in defending the work-based and pro-family regime that constitutes the very basis of our economic and social system. Regarding inflation, we are now back in the region’s country group; in fact, in November, the Czech Republic recorded a higher year-to-year rate of inflation than we did. Both the Hungarian economy and the government’s economic policy have proved to be crisis-proof, even in the face of the world economy’s headwind we have managed to preserve the foundations of growth and the underlying fabric that guarantees the health of an innovative economy.

Therefore, a growth accelerating to 4 per cent in 2024 according to our expectations is not wishful thinking on the government’s part, but a direct consequence of the processes of 2023. A swift recovery started from the third quarter on, and economic output is on the rise again – in fact, on a quarterly basis, it is one of the highest in the EU. Our most important balance indicators have been restored, with the passage of the energy crisis our twin deficit, too, is a thing of the past, our foreign trade and external balance are causing ever further positive surprises month after month. This favourable economic outlook was also confirmed by the credit rating agencies in December.

However, a positive economic outlook in itself won’t be enough for guaranteeing economic growth, and the government can’t remain an idle observer – we must continue the earlier proactive and well-targeted economic policy. In order to restore economic growth, we must, first of all, take a step forward in three areas which are, at that, interconnected. As a first step, we must restore retail consumption; as a second step, we must significantly incentivise production and investment in the internal economy; and as a third step, we must further increase the level of activity on the labour market.

I. Restoring the level of consumption

Since 2010, the welfare of Hungarian families has been the number one and most important priority for the Christian-conservative government: we must therefore restore the subjective sensation of welfare and with this, the level of retail consumption because only self-confident, optimistic families will begin to boldly make up for their lost consumption. The rise in real wages which resumed from September 2023 will be an important pillar of the return of growth; in 2024 it will accelerate, approaching the average annual growth of around 5 percent experienced in previous years. The fall in inflation and the dynamic increase of the minimum wage and the guaranteed wage minimum by 15 and 10 per cent, respectively, will play a central role in this. At the same time, a rise in real wages is a necessary, but in itself insufficient condition for the recovery of the economy. We must therefore achieve enhanced confidence on the part of the Hungarian population as regards the country’s economic future, meaning that we must lower the so-called precautionary motive.

Figure 1: Development and forecast of Hungarian gross wages and wages in real terms (2005-2024E)

Photo credit: Hungarian Central Statistical Office, National Bank of Hungary

It may facilitate the lowering of the precautionary motive that the net financial worth of Hungarian households – not including real property assets – is today significantly higher both compared to 2010 and to the countries of the region. In the second quarter of 2023, it amounted to around 107.2 per cent to GDP, while it was 98.6 per cent in the Czech Republic, 64.4 per cent in Poland, 59.4 per cent in Romania and 40.7 per cent in Slovakia. Just as an aside, while the Hungarian value is at present still below the average of the Member States of the EU (which stood at 148.8 per cent at the end of 2022 according to Eurostat data), if we also include real property assets, the total net worth of Hungarian households is already above the EU average – and this is an enormous achievement of the post-2010 governmental policy.

The most important source of expansion in financial assets lies in the creation of self-financing capacity; in other words, the ability to ensure that today Hungary is in debt to itself. In 2022, 21.2 per cent of the sovereign debt was held by Hungarian households, and additionally, this percentage was only higher than 10 per cent in three countries, while in the rest of the EU’s Member States it didn’t even reach 10 per cent. In 2023 retail interest earnings realised on government securities reached 2 per cent of GDP, while all financial assets included, they exceeded 4.2 per cent of GDP which is more than double the EU average.

Naturally, consumption can be restored not only through the utilisation of the available assets, but also from consumption accounting once again for an ever larger percentage of the disposable income, the disposable monthly earnings. In earlier years when the economy was not exposed to external shocks such as the coronavirus pandemic, members of the public set aside far less than 10 per cent of their annual disposal incomes as savings. In 2023, however, the rate of retail financial savings almost doubled compared with earlier expectations, and peaked significantly above 10 per cent which has led to a fall in the rates of investment and consumption. The development of the volume of retail sales, too, clearly testifies to a rise in the public’s propensity to save and a parallel decrease in the public’s propensity to consume: significantly breaking the pre-coronavirus trend, at the end of 2023, the volume of retail sales did not even reach the pre-lockdown level at the beginning of 2020.

Figure 2: Volume of retail sales in Hungary (2017-2023)

Photo credit: Hungarian Central Statistical Office

Consequently, at present, the public’s propensity to save is much higher than would be optimal, thereby setting in motion a self-generating process: while extreme caution will later justify itself, it has already in the short term started eroding the real economy’s foundations, also withering supply through demand. The harmful effects of this process are not yet in evidence in the numbers of production and investment in the internal economy, and so it is essential to boost the recovery of the local economy supplying local needs after the restoration of domestic demand.

II. Restoring production and investment in the internal economy

Despite the external shocks of recent years, the underlying fabric of the Hungarian economy has remained intact and the Hungarian economy itself has remained export- and investment-based. However, the duality of the structure of industry has come to the surface: the sectors producing goods for exports continue to remain resilient and are doing fine, but the production activities of sectors producing goods primarily for the internal economy are faltering. In the first ten months of 2023, the volume index of industrial production only increased in three of the manufacturing industry’s 13 sectors compared with the previous year’s corresponding period, while there was a double-digit increase only in two sectors with strong ties to export markets, in motor vehicle production (11.2 per cent) and the manufacture of electrical equipment (15.5 per cent). Meanwhile, there was a decline above 10 per cent in as many as 6 sectors, including the food industry (-11.8 per cent) and the sector of wood processing and the manufacture of paper and paper products (-11.9 per cent). As a result, it is clear already at this point that the recovery of the sectors that are more sensitive to domestic sales will pose a more formidable challenge in 2024.

The asymmetry of industrial production also emerges in the asymmetry of investments: in the third quarter of 2023, the volume of investments fell by 12.1 per cent, and we saw a decline in 13 of the 19 sectors of the national economy. The bulk of the decline could be observed in real estate transactions and the transportation and warehousing sector – these tend to reflect the current domestic situation, and following from their cyclical nature, they will gain in strength again with the upturn of the economy. At the same time, the export-oriented segment of the manufacturing industry did outstandingly well even amidst the crisis: large, well-capitalised international companies are carrying out expansion projects in Hungary by scrutinising the future, rather than by focusing on the developments of the present.

Incentivising investments is an especially important priority because this is one of the strongest cogwheels in the process of restoring economic growth. It is therefore extremely important for us to continue to keep investments in a range above 25 per cent. For years, we recorded the highest values in the EU; our investment rate of 28.2 per cent to GDP in 2022 was nothing short of an outstanding achievement. In the first three quarters, the Hungarian investment rate “fell” to 26.3 per cent due to a decrease in state and household investments. However, it is good news that even after this relative fall, we are in fourth place in the EU, and if everything goes to plan – as far as the government’s plans are concerned – we will remain at the top of the 2023 rankings as well.

Businesses account for 60 per cent of Hungarian investments, while the remaining 40 per cent is shared in equal proportions by the state and households. The temporary weakness of state investments is responsible for the bulk of the decline in investments: from the earlier state investment rate of above 6 per cent to GDP – which was one of the highest in the EU – we have come to below 5 per cent. A shortage of funds leaking through the holes that were punctured in the economy by the flawed Brussels sanctions introduced due to the war is the primary cause of this – we can only cut our coat according to our cloth, and we don’t want another IMF loan, thank you very much.

The investments of Hungarian households are below the EU average, but are in line with the region’s average. The ‘CSOK Plus’ housing benefit programme, the raised limit of the ‘Village CSOK’ housing benefit programme and the raised amounts of the baby expecting loans starting from January can boost these investments.

Figure 3: Investment ratio in Member States of the European Union (2022 Q2 – 2023 Q2)

Photo credit: Eurostat

By contrast, businesses continue to boast a near-record investment activity rate of around 17 per cent. Meaning that the private actors of the real economy vote – even of their own accord – with their money for Hungary’s future collective growth, they themselves expect a dynamic course of growth. The investment rate of businesses continues to remain one of the highest, 4 percentage points higher than the EU’s average of 13 per cent, and has not decreased as much as we have observed in the case of state investments due to their postponement. The overall picture is positive also inasmuch as that the state – experiences show – rather than crowding out or substituting for the investments of the private sector, successfully incentivises businesses, thereby crowding private investments in. Every forint placed by the state in the production economy falls on fertile ground, meaning that the returns are many times over the investment.

The most important experience of 2023 is that there is, however, a degree of duality behind investments: there is a steady increase in investments in sectors manufacturing for exports and their volume is above average, while the investment activities of sectors primarily manufacturing for the internal economy have come to a halt, and are below the average. This, too, testifies to the dual nature of the structure of our economy which we must remedy. It is promising that the world-beating Chinese electric vehicle manufacturer BYD has chosen Szeged as the site for the construction of its first car manufacturing plant in Europe, and the foreign giga-investments announced in recent years such as the projects of SK Innovation, CATL and BMW will turn active in the years ahead and will have an even more significant, positive impact on the economy. Our FDI incentive strategy has perhaps never worked better.

Figure 4: Investment ratio of non-financial corporations in the EU (2022)

Photo credit: Eurostat

We can conclude that there won’t be any problem with the production and investments of sectors relying on export markets; in fact, they will start increasing in earnest in the years ahead. However, the foreign-domestic asymmetry must be reduced. The strengthening of the internal economy – which is constituted primarily by domestic-owned companies – must switch to a new, higher gear. We are planning to achieve this in 2024 with four instruments, each of which is extremely powerful on its own:

1. The government has already decided on the expansion of the ‘Széchenyi Card Programme MAX Plus’; one of the most successful governmental credit programmes of all time can also continue in 2024.

2. With the continuation of the Baross Gábor Reindustrialisation Credit Programme (allocating a further HUF 200 billion for the purpose), the government has already set aside HUF 1,200 billion in total for the economy.

3. Additionally, the allocation of the Food Industry Supplier Development Programme launched with a view to strengthening Hungarian businesses has been increased almost six-fold.

4. We must further launch a new credit programme, too, this year. As we are bringing back into the Hungarian economy an ever larger percentage of the Hungarian funds reallocated by Brussels to Ukraine, we can start drawing on the 2021-2027 cohesion funds to the value of EUR 10.2 billion. As a result, a significant part of the ‘GINOP’ Economic Development and Innovation Operational Programme plus funds will also serve the incentivisation of investments in sectors manufacturing for domestic consumption in the near future.

With the above-listed, well-targeted measures, we will not only prevent an internal domestic rupture, but will also protect the very fabric of the Hungarian economy. Additionally, we will give the economy an investment impetus which will enable it to safely return to a course of high potential growth. The comprehensive approach to the development of the economy, the widening range of instruments and the ever-broadening range of economic development programmes will boost investments, while investments will in turn – as a driving force – restore growth.

III. Incentivising labour market activity

In Hungary, more than 4.75 million people have jobs; since 2010, the number of people in employment has increased by 1 million, while the number of registered jobseekers has fallen to an all-time low. While in 2010, Hungary’s 10.8 per cent unemployment rate was the 11th worst in the EU, in the third quarter of 2023 this had fallen to 4 per cent which is the 7th best internationally. There is full employment in almost every corner of the country.

These days, everyone who wants to can find a job. However, we must further increase employment to achieve economic growth and to implement new projects. Hungary continues to have an internal workforce reserve of above 300,000 persons at its disposal, and so the goal is to activate this reserve, to incentivise even more people to want to work and to move to the labour market from the realm of passivity. Jobs and families must be protected, and so it is the goal of the government to provide the available jobs for Hungarians as long as there are available Hungarian workers, and the idea of employing foreign workforce can only emerge once this reserve has been exhausted. At present, in addition to 45,700 workers of Ukrainian and Serbian nationalities, in Hungary 55,400 foreign guest workers are working after having undergone immigration screening, and the government has maximised their permitted number at 62,000.

In 2024, on the front of investments we will achieve new successes which will necessitate a further increase in labour market activity; this will constitute the third cogwheel of the growth – and welfare – jump. We cannot be satisfied until the activity rate in the 15 to 64 age group increases from the present 78 per cent to 85 per cent. In order to facilitate this, we will supplement the EU credit programme with a new labour market programme in order to simultaneously strengthen all three cogwheels of growth: from the incoming EUR 10.2 billion EU funds, we will allocate a significant percentage of the ‘GINOP plus’ funds to programmes that seek to increase the activity rate.

Figure 5: Activity rate of persons aged 15-64 years in the Member States of the European Union (2023 Q3)

Photo credit: Eurostat

The economy grows under pressure, but finally this year there will be great pressure not only on the economy, but also within the economy because the structure of our economy will turn the negative stress into positive stress, into performance. With the war being waged in our neighbourhood and the ensuing sanctions, we have been dealt a serious blow, but with the joint efforts of the Hungarian public and the actors of the economy, we have now moved much closer to building an economy which is driven not only by opportunities, but is also thrust forward by crises; one which is continuously strengthened by Hungarian creativity. All this will be achieved primarily through investments: our businesses are implementing ever more creative innovations improving productivity by responding to the earlier crisis situations and paying attention to future opportunities.

The original, Hungarian version of the article can be found here