Figure 1. Inflation has declined amid weak economic activity, but wage growth remains strong 11

Figure 2. Ageing-related public expenditures are set to increase 13

Figure 3. Economic losses from natural disasters are high while insurance compensation is low 14

Figure 4. Educational attainment has stalled 15

Figure 5. Hungarian SMEs tend to be small and contribute little to value added 16

Figure 1.1. Economic growth has been subdued since mid-2022 21

Figure 1.2. Labour market tightness has receded 22

Figure 1.3. The working-age population is declining and the employment rate is plateauing 22

Figure 1.4. Inflation has receded 23

Figure 1.5. The retail margin cap led to a one-off decline in the prices of basic food products 23

Figure 1.6. Strong wage growth has been the main domestic driver of inflation since mid-2023 24

Figure 1.7. Real wage growth in Hungary is among the highest in the OECD 25

Figure 1.8. Hungary's relative cost competitiveness has weakened recently 25

Figure 1.9. In recent years, gains in export market shares have been limited 28

Figure 1.10. Monetary policy remains mildly restrictive 29

Figure 1.11. Household credit has rebounded more strongly than corporate credit 29

Figure 1.12. Inflation expectations are less firmly anchored than before COVID 30

Figure 1.13. Banks are well capitalised and the share of non-performing loans has declined 31

Figure 1.14. Business failures have increased since 2022, mainly in the construction sector 32

Figure 1.15. House prices have accelerated and show signs of overvaluation 32

Figure 1.16. The needed fiscal consolidation is expected to stop from 2025 33

Figure 1.17. High inflation and interest rates and a low credit rating have propelled debt servicing costs to historically high levels 35

Figure 1.18. Ageing-related public expenditures are set to increase 37

Figure 1.19. Population ageing will weigh on the tax-to-GDP ratio 38

Figure 1.20. Addressing the fiscal impact of ageing is key to safeguard fiscal sustainability 39

Figure 1.21. Required fiscal adjustment to stabilise the debt-to-GDP ratio 39

Figure 1.22. The pension replacement rate is relatively high while old-age poverty is low 41

Figure 1.23. Public infrastructure governance indicators show room for improvement 43

Figure 1.24. Tax buoyancy and the share of income taxes and SSCs are low in Hungary 44

Figure 1.25. Spending for family support is not correlated with fertility rates 46

Figure 1.26. VAT compliance is high but reduced rates limit VAT revenues in Hungary 47

Figure 1.27. Property tax revenues are low compared to other OECD countries 48

Figure 1.28. Intergenerational income mobility remains low, as well as inheritance taxation 50

Figure 1.29. The tax wedge for low-income workers is relatively high 52

Figure 1.30. Most Hungarian taxpayers would gain from a PIT reform on labour income 52

Figure 1.31. Avoidable mortality is high while health taxes are low compared to other OECD countries 55

Figure 2.1. Net GHG emissions have decoupled from growth but progress has stalled recently 63

Figure 2.2. High dependence on imported energy and low share of renewables 64

Figure 2.3. Energy prices in the transport and building sectors are low 67

Figure 2.4. Hungary is very exposed to flooding and extreme temperature risks 69

Figure 2.5. Economic losses and fatalities caused by natural disasters are high 70

Figure 2.6. The potential impact of climate disasters is higher than in neighbouring countries 71

Figure 2.7. When climate risks materialise, insurance compensation is low 73

Figure 2.8. Hungary lags behind many OECD countries in private sector adaptation initiatives 77

Figure 3.1. The gender employment gap is now below the OECD average, contrary to the wage gap 88

Figure 3.2. Hungarian women are largely absent from STEM fields 89

Figure 3.3. Generous family leave entitlements induce long career interruptions for Hungarian women after childbirth 91

Figure 3.4. Women face some "glass-ceiling" effects, notably on company boards of directors 92

Figure 3.5. A large majority of children below three are not enrolled in formal childcare 93

Figure 3.6. Formal long-term care is little developed 94

Figure 3.7. Youth labour-market outcomes in Hungary have improved over time 95

Figure 3.8. The proportion of young people neither in employment, education or training is close to the OECD average 95

Figure 3.9. Financial returns to higher education in Hungary are relatively high 97

Figure 3.10. The diffusion of tertiary education attainment has stalled 98

Figure 3.11. The socio-economic background of Hungarian students has a strong influence on their educational achievements 99

Figure 3.12. Average class size in Hungarian primary schools is above the OECD average 101

Figure 3.13. At secondary level, a rising proportion of Hungarian students is over-aged and drops out of school 101

Figure 4.1. Hungarian SMEs tend to be small and contribute little to value added 109

Figure 4.2. There is a large productivity gap between Hungary and OECD peers, and between Hungarian SMEs and larger firms 109

Figure 4.3. Concentration and markups have risen faster in Hungary than elsewhere in Europe 111

Figure 4.4. Product market regulations in Hungary are not conducive to productivity growth 111

Figure 4.5. Firm creation is relatively low 113

Figure 4.6. There is significant room to strengthen the control of corruption 114

Figure 4.7. Collateral constraints are more prevalent in Hungary than elsewhere in Europe 117

Figure 4.8. Subsidised loans and grants represent a significant share of corporate financing 118

Figure 4.9. Business expenditures on R&D and firm innovation are relatively low 119

Figure 4.10. Non-bank capital financing is hardly available 121

Figure 4.11. Hungary has a strong digital infrastructure, with some regional disparities 122

Figure 4.12. The digitalisation of SMEs is lagging behind 123

Figure 4.13. Digital training should increase to boost ICT usage in SMEs 124

Figure 4.14. Telecommunication prices in Hungary are relatively high and rising 125

Figure 4.15. To support digitalisation, the government should lead by example 126

Figure 4.16. The large but declining FDI stock is increasingly concentrated in manufacturing and originated from outside the OECD 127

Figure 4.17. Foreign-owned firms tend to be more productive than domestic firms 128

Figure 4.18. Foreign-owned firms contribute disproportionately to Hungarian exports, but with a low domestic content 129

Figure 4.19. The automotive industry mainly outsourced production functions to Central and Eastern Europe 130

Figure 4.20. Hungarian SMEs rely little on foreign technology 130

Figure 4.21. Productivity increases as industrial Hungarian firms start supplying top firms 131

Figure 4.22. Hungary's FDI regulations are among the least restrictive in the OECD 132

Figure 4.23. There is scope to foster business-science linkages 134

Figure 4.24. The quality of road and railway infrastructure is relatively low 135

Figure 4.25. Insufficient skills hinder firm development and increase the risk of automation 136

Figure 4.26. Management practices in Hungarian SMEs are below international standards 137

Figure 4.27. Adult learning participation is seemingly high, but unequal, and training time is short 138