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Contradictory processes are taking place in the Hungarian economy: while retail and domestic consumption are clearly booming, industry and exports are still struggling, yet we are not seeing any disruption to the external balance. The situation is complicated by the fact that, despite years of economic stagnation, there are no signs of a break in wage convergence.
It is difficult to interpret the processes currently taking place in the Hungarian economy. It is clear to everyone that we have been stagnating for years, as evidenced by the third quarter GDP data, but there are much more complex processes at play in the background, writes Világgazdaság.
Hungarian economy
A duality has been observable in the Hungarian economy for some time now: while some sectors are performing surprisingly well, sectors that were previously considered to be driving forces continue to paint a bleak picture. Retail trade has grown by 2.8 percent since the beginning of the year, which is not a significant increase, but GDP data show that consumer spending is up 5 percent, so consumption continues to be the basis for growth.
Photo: Pexels
It is also interesting to ask why domestic companies are able to absorb higher wage costs in such a difficult economic situation. Next year could be the fifth consecutive year in which gross wage growth exceeds 9 percent, which is heavily influenced by inflation, but still indicates very strong wage convergence. This is despite the fact that companies have developed enormous excess capacity due to the weak external economic situation.
The fact that we are not seeing mass bankruptcies among companies may indicate that there has been some productivity growth in certain sectors, meaning that even though the Hungarian economy is stagnating, some companies are adapting and improving their efficiency through measures such as reorganizing working hours or digitization.
This is partly supported by Eurostat data. The Statistical Office of the European Union tracks labor productivity based on hours worked, which shows that although productivity has been falling steadily since the first quarter of 2024, there has been a turnaround in the last quarter, with a 2 percent increase.
However, Péter Virovácz, senior analyst at ING Bank, is skeptical that productivity growth really explains the current developments, which he believes should also be reflected on the investment side.
In the analyst’s view, this is why we are not seeing any disruption to the external balance, and moreover, there is a lack of investment, as these projects in Hungary are very import-intensive.
As far as wage convergence is concerned, he believes that companies are still waiting for the cycle to turn sooner or later and economic growth to start. “When the cycle turns and they see that the labor force is steadily declining, they will not let their employees go. But they can only retain them by raising wages to around the minimum wage,” the analyst explained.
Although many people have the impression that Hungary is an assembly plant where countless factory workers toil on assembly lines for low wages, the reality is more nuanced. In the past year alone, there have been several announcements indicating that economic policy has also recognized the need to shift the Hungarian economy from extensive growth to intensive growth. Here are just a few examples from the past:
- The American Diligent Corporation’s record-breaking investment of 37 billion forints (96 million euros) in research and development in Hungary will create 124 new jobs.
In May 2025, BYD announced that it would establish its European headquarters in Budapest, which will also be a new research and development center.
At the end of July, US industrial automation giant Emerson announced that it would expand its Hungarian operations through new smart investments, investing a total of 6.2 million euros and creating more than 50 new jobs in two projects.
In October, it was revealed that Siemens would further develop its R&D center in Budapest, with the German company creating 40 new highly skilled jobs with an investment of approximately 14.7 million euros.
However, it is also true that Hungarian productivity has room for improvement. At the end of last year, the Hungarian National Bank published its productivity report, which highlights that productivity growth offers significant growth potential for the Hungarian economy.
In 2024, the Hungarian indicator reached 73.5 percent of the EU average, which is higher than the 2020 level but still the lowest among the Visegrad countries.
If we look at labor productivity in a narrower sense, i.e., the economic output per employee or per unit of working time, we can see that the rate of productivity growth has declined across Europe so far in the 2020s. This is not surprising, given that during this period we had to contend with Covid, the energy crisis, soaring inflation, and the economic consequences of the war in Ukraine. Hungary achieved growth of over 3 percent between 2017 and 2019, but this fell to an annual average of 1 percent between 2020 and 2023.
According to Concorde analysts, Hungary reached 64 percent of the EU average for labor productivity at the end of 2024.
Although overall convergence has been clear since EU accession, the improvement is overshadowed by deep structural problems and strong external pressures, making it difficult to achieve what could be considered an ideal result, they concluded.
The situation is slightly better when looking at GDP per hour worked, where Hungary stood at 70.3 percent of the EU average in 2023, up from 67.5 percent in 2019. Although this performance lagged behind the Czech Republic’s 80 percent, Poland was behind us at 64.9 percent.
Via Világgazdaság; Featured image: Pixabay
The post This Is The Reason Why Companies Can Afford to Pay Wage Increases appeared first on Hungary Today.
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