Presentation of the 2019 OECD Economic Survey of Hungary

OECD ECONOMIC SURVEY OF HUNGARY 2019 PROMOTING A STRONGER AND MORE INCLUSIVE ECONOMY Budapest, January 31st 2019 http://www.oecd.org/eco/surveys/economic-survey-hungary.htm

@OECDeconomy @OECD

Key messages • The economy is growing strongly • Policies should address risks to the recovery • Greater inclusiveness would bolster growth • Ageing-related costs are increasing

2

The recovery remains strong Quarterly GDP at seasonally adjusted annual rates 6

4

2

0

-2

-4

-6

-8

2009Q2 2009Q4 2010Q2 2010Q4 2011Q2 2011Q4 2012Q2 2012Q4 2013Q2 2013Q4 2014Q2 2014Q4 2015Q2 2015Q4 2016Q2 2016Q4 2017Q2 2017Q4 2018Q2

3

Domestic demand is driving growth Quarterly % change at seasonally adjusted annual rate 6 4 2 0 -2 -4 -6 -8 -10 -12

Government final consumption

2010

2011

Private final consumption

2012

2013

Gross capital formation

2014

2015

Net trade of goods and services

2016

2017

GDP

2018

4

Employment is at unprecedented levels and unemployment at historically lows % of labour force 14

Index Q1 2010 = 100 130

12

125

10

120 Unemployment rate (left axis)

8 6

115 110

Total employment (right axis)

4

105

2

100

0

2010

2012

2014

2016

2018

95

5

Improving well-being is key Better Life Index, country rankings from 1 (best) to 35 (worst), 2017ยน

20% top performers

60% middle performers

20% bottom performers

Hungary

12

23

25

26

27 30

Work-life balance

Housing

Education and skills

Jobs and earnings

Environmental quality

Income and wealth

31

31

Civic engagement

Health status

31 Social connections

32 Personal security

33 Subjective wellbeing

1. Each well-being dimension is measured by one to four indicators from the OECD Better Life Index set. Normalised indicators are averaged with equal weights.

Source: OECD (2017), OECD Better Life Index, www.oecdbetterlifeindex.org.

6

Wages are rising fast Growth (y-o-y) in monthly earnings in the private sector

14 13 12 11 10 9 8 7 6 5 4 3 2 1 0

2010

2011

2012

2013

2014

2015

2016

2017

2018 7

Inflation is on the rise Inflation 7

Inflation tolerance band

Headline inflation

Core inflation

6 5 4 3 2 1 0 -1 -2

2010

2011

2012

2013

2014

2015

2016

2017

1. Core inflation excludes energy and food. Three-month moving average for monthly earnings in the private sector.

Source: OECD (2018), OECD Main Economic Indicators (database).

2018

8

Ageing is becoming a challenge Old age dependency ratio Ratio of population aged 65+ per 100 population 20-64 60 50 40 30 20 10 0

2016

2020

2030

2040

2050

2060

2070

1. Data are based on the technical assumptions by the EU AWG, i.e. convergence towards the EU mean.

Source : European Commission (2018), "The 2018 Ageing Report - Economic & Budgetary Projections for the 28 EU Member States (2016-2070)", DirectorateGeneral for Economic and Financial Affairs, Institutional Paper 079, Luxembourg.

9

Ageing cost could impact on public debt 200 180 160 140 120

General government debt, Maastricht definition, as a percentage of GDPยน

Baseline Not offsetting increase in age-related costs Consolidation effort Lower GDP growth by 1 % pt per yer

100 80 60 40 20 0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 10

Macro-policy recommendations

• Gradually increase policy interest rates • Continue to exit from unconventional monetary policy measures • Tighten fiscal policy to avoid overheating of the economy 11

FOSTERING INCLUSIVE GROWTH

12

Hungary attracts foreign investment Stock of inward FDI as a percentage of GDP

100 90 80 70 60 50 40 30 20 10 0

SVN

LTU

OECD

AUT

POL

EURO zone

SVK

LVA

HUN

CZE

EST

Source : UNCTAD (2018), OECD Economic Outlook: Statistics and Projections (database).

13

FDI is concentrated in the west Gross domestic product per capita in HUF million, 2016

14

Overall productivity is low 90

Real GDP per persons employed, in USD thousand, constant prices, 2010 PPPsยน

80 70 60 50 Hungary 40

Austria

Germany

EU28

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

1. PPPs: purchasing power parities.

Source: OECD (2018), OECD Productivity Database .

15

Domestic producers could benefit more from foreign investment 250

Domestic value added embodied in foreign final demand per worker In USD thousand

200 150 100

0

LVA POL HUN TUR LTU CHL CZE EST SVK PRT GRC SVN ESP KOR NZL JPN ITA DEU ISR FRA GBR NLD AUT FIN ISL CAN BEL DNK AUS SWE USA CHE LUX IRL NOR

50

Note: Domestic value added embodied in foreign final demand per worker refers to domestic employment embodied in foreign final demand.

Business activities also include real estate and rental services.

Source: OECD (2018), OECD STAN (database); and OECD (2018), Trade in Value Added (TiVa) (database), October.

16

Continuing to fight corruption is key 80 70

Corruption Perceptions Index 2017 on a scale from 0 (very clean) to 100 (highly corrupt)

60 50 40 30 20

0

NZL DNK FIN NOR CHE SWE CAN LUX NLD GBR DEU AUS ISL AUT BEL USA IRL JPN EST FRA CHL PRT ISR SVN POL LTU LVA CZE ESP KOR ITA SVK GRC HUN TUR COL MEX

10

Source: Transparency International

17

Recommendations to boost growth locally • Allow local authorities to identify and execute projects that develop their local economy.

• Give vocational schools greater autonomy to specialise and adjust courses and curriculums to local labour market needs.

• Establish a dedicated anti-corruption agency 18

Labour market shortages are starting to bite 88

100

86

90

Capacity utilisation

84

Labour shortage indicatorยน

80

82

70

80

60

78

50

76

40

74

30

72

20

70

10

68

0

2010

2011

2012

2013

2014

2015

2016

2017

1. Percentage of manufacturing firms pointing to labour shortages as a factor limiting production.

Source: Eurostat Industry database.

2018

19

Labour mobility is low %

Share of employees staying 10 years or more in the same company or organisation

50 45 40 35 30 25 20 15 10

CZE

SVN

HUN

LTU

LUX

DEU

ITA

AUT

IRL

PRT

BEL

EU

FIN

EST

GRC

LVA

NLD

FRA

SVK

ESP

GBR

DNK

POL

0

SWE

5

20

Poorer regions have fewer jobs Employed persons excluding participants in the Public Work Scheme as a percentage of the populationš

65 60 55

Central Hungary

Central Transdanubia

Western Transdanubia

Southern Transdanubia

Northern Hungary

Northern Great Plain

Southern Great Plain

50 45 40

2011

2012

2013

2014

2015

2016

2017

1. Data refer to the population aged 15 to 74.

Source: Adapted from Hungarian Central Statistical Office (2018), "6.2.1.1. Economic activity of population aged 15–74" and "6.2.1.3. Number of employed persons", Tables (STADAT) ; and Ministry of Interior.

21

Higher-skilled workers have more jobs As a percentage of working-age population by region, 2017ยน

90 80 70 60 50 40 30 20

Less than primary, primary and lower secondary education

Northern Hungary

Northern Great Plain

Western Transdanubia

Southern Great Plain

Tertiary education

Southern Transdanubia

Central Central Hungary Transdanubia

1: Regions are ranked in descending order by the employment rates of the population aged 20-64 with tertiary education. Working-age population refers to those aged 20-64.

22 Source: Eurostat (2018), "Regional employment", Eurostat Database .

Many mothers with young children are out of the labour market As a percentage of working-age female population, 2017ยน

100

Mothers with one child below 6 years

Mothers with one child above 12 years

80 60 40 20 0

Hungary

European Union

Average of top 5 EU performers

1. Data refer to population aged 15-64.

Source: Eurostat (2018), "Gender equality", Eurostat Database .

23

Recommendations to address labour market challenges: • Continue to reduce public work schemes • Enrol participants and other job seekers in training programmes that leads to jobs • Extend duration of unemployment benefits • Provide geographical mobility support and activation measures • Better work-life balance for mothers:

– Expand the supply of crèches – Reduce parental leave and expand paternity leave 24

CHALLENGES OF AGEING:

25

Public spending on pensions is relatively low A. As a percentage GDP 16 14 12 10 8 6 4 2 0

CZE

LUX

HUN

SVN

BEL

ESP

GRC

PRT

AUT

26

Poor pensioners are found in poor regions Average of full pension provision by county, as a percentage of net monthly earnings, January 2018

27

Ageing-costs will increase Total ageing related spending

As % of GDP 18

16

14

12

10

8

6

2020

2030

2040

2050

2060

2070

Source : European Commission (2018), "The 2018 Ageing Report - Economic & Budgetary Projections for the 28 EU Member States (2016-2070)", DirectorateGeneral for Economic and Financial Affairs, Institutional Paper 079, Luxembourg.

28

People that interrupt their careers have low pensions 100

90

Gross pension entitlements as a percentage of full-career entitlements, mandatory pensions only

80

70

50

HUN GRC CHL TUR MEX POL ISR ISL ITA FIN EST JPN DEU AUT CZE USA KOR NLD OECD PRT SVK BEL SWE CHE SVN CAN LUX DNK ESP NOR FRA AUS IRL NZL GBR

60

29

Low-income retirees slide into poverty % of average monthly net salary

60

Scenario 1: Full career on minimum wage Scenario 2: Short career on minimum wage

50

Scenario 3: Women on minimum wage and having 2 children

40

Poverty line

30 20 10 0

65

70

75

80

85

90

95

100

Age 30

Pension recommendations

• Raise the statutory retirement age to 65 by 2022. Then link to gains in life expectancy.

• Introduce a basic state pension for all pensioners.

• Other measures include: – Introduce constant accrual rates – Remove all possibilities for early retirement – Secure similar pensions for similar careers 31

Life expectancy is low Years

Life expectancy at age 65

26

22

18

10

LVA HUN LTU SVK TUR MEX CZE EST POL USA CHL DNK OECD DEU NLD IRL SVN PRT GBR ISL FIN AUT BEL GRC SWE NOR NZL KOR ISR CAN LUX AUS ITA CHE FRA ESP JPN

14

Note: The OECD aggregate is calculated as an unweighted average of the data shown. Life expectancy at age 65 is calculated as the unweighted average of the life expectancy at age 65 of women and men.

Source : OECD (2018), "Health Status", OECD Health Statistics (database).

32

Lifestyles impact negatively on health Among OECD countries, 2017 or nearest year available

%

45 40 35 30 25 20 15 10 5 0

Lowest (MEX)

OECD

HUN

Dailly smoking

Highest Lowest (GRC) (TUR)

OECD

HUN

Alcohol consumption

Highest Lowest (LTU) (JPN)

OECD

HUN

Highest (USA)

Adult obesity

33

0

20

0 MEX CHL SWE CAN GBR DNK NZL TUR USA ESP ISR IRL ISL ITA PRT NLD NOR AUS FIN GRC SVN CHE OE… EST LUX BEL LVA SVK FRA POL LTU CZE HUN AUT DEU KOR JPN

14

MEX TUR NLD DNK NOR AUS IRL SWE USA CHL BEL ISL GBR ISR SVN ESP GRC POL EST SVK OE… NZL PRT LVA LTU ITA CAN AUT FIN CHE FRA LUX DEU CZE HUN KOR

Health care is highly hospital-centered A. Hospital beds

Per 1 000 population, 2017 or nearest year available2

12

10

8

6

4

2

B. Average length of stay in hospital In days3

2016

15

10

5

34

The shortages of health workers is especially severe in poor rural areas Unfilled GP practices/100 000 people

35

Long-term care is under developed A. Public expenditure on LTC by type of service As a percentage of GDP, 2015 or latest available 6 Institution-based (health sector)

Home-based (health sector)

Social sector

5 4 3 2

NOR

NLD

FIN

BEL

SWE

AUT

GBR

DNK

IRL

FRA

ITA

LUX

CZE

DEU

LTU

SVK

SVN

EST

HUN

ESP

PRT

POL

LVA

0

GRC

1

Source : European Commission (2018), "The 2018 Ageing Report - Economic & Budgetary Projections for the 28 EU Member States (2016-2070)", Directorate-General for Economic and Financial Affairs, Institutional Paper 079, Luxembourg.

36

Health recommendations • Reduce hospital stays by:

– enhance outpatient care – concentrate inpatient care in fewer, better equipped and more specialised hospitals.

• Increase hospitals’ autonomy and update the DRG tariffs to adjust supply in line with demand changes • Strengthen GPs’ gatekeeper and coordinator roles by increasing pay-for-performance financing • Further promote group practices for GPs • Integrate the various long-term care systems.

• Use cash benefits and vouchers to improve access to home and institution-based long-term care 37

Environmental outcomes can be improved, particularly particles emissions Particles emissions Mean annual concentration of PM2.5 (Âľg/mÂł)

30 25

Hungary

20 15

OECD

10 5 0 1999

2001

2003

2005

Source : OECD (2018), Green Growth Indicators (database).

2007

2009

2011

2013

2015 38

Greening growth recommendations

• Use road tolls and car taxes that include vehicles’ environmental performance • Introduce congestion charges and strengthen public transport • Use fiscal incentives to replace inefficient and high-emission heating systems

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For more information

http://www.oecd.org/eco/surveys/economic-survey-hungary.htm Disclaimers: The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

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