Opening Doors - Invest In Hungary by Hungarian Investment Promotion

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Summary
- In 2017, the growth rate of the Hungarian economy will increase significantly
The consumer confidence index reached its ten-year high in December last year
- By the end of 2017, public debt may decline to below 73% of GDP
This year, the inflation rate will increase substantively relative to the 2016 figure
After a setback in 2016, the value of global foreign direct investment may resume its increasing trend
In the World Bank's 'Doing Business 2017' publication, Hungary moved up one rank relative to the previous year
In the first ten months of 2016, the value of Hungarian exports grew to EUR 77.4 billion, while imports increased to EUR 68.86 billion
- Between September and November 2016, the average number of employees was 4,414 thousand, which is 3.3% higher than a year before
In September-November 2016, the unemployment rate decreased by 1.7 percentage points to 4.5% compared to the same period in 2015
In January to October 2016, gross average earnings increased by 6.0% on a year- on-year basis
As of 1 January 2017, the social contribution tax decreased to 22%, the minimum wage and the guaranteed wage minimum increased to HUF 127,500 and HUF 161,000 respectively

Economic Growth
The Hungarian gross domestic product was 2.2% higher in Q3 2016 than in the same period of the previous year. Market-based services and agriculture contributed the most to this growth. According to the figures balanced and adjusted seasonally and with the calendar effect, the output of the economy increased by 1.6% compared to the same quarter in 2015 and by 0.3% compared to the previous quarter.

On the production side, the added value of industry increased by 0.8%, including that of the manufacturing industry increasing by 0.7%, compared to the same period in the previous year. Within manufacturing, the manufacture of computer, electronic and optical products showed the most marked growth. The output of the construction sector has declined by 12% in Q3. It should be noted that the value added by agriculture increased by 21%, which was reflected in the favourable harvest results.

The gross value added by services in aggregate was up by 2.6%, while the value added by trade, accommodation and food and beverage services increased by 5.1%. As a result of the expansion of IT services, the value added by the information and communication section increased by 1.8%. The aggregate added value of professional, scientific, technical and administrative activities rose by 5.8%; professional, scientific and technical activities produced the most significant expansion.

The main contributors to the 2.2% GDP growth in Q3 2016 were services, industry and agriculture at 1.3, 0.2 and 1.0 percentage point, respectively. In contrast, construction reduced the GDP growth rate by 0.4 percentage point.

On the consumption side, the actual consumption of households increased by 3.8% relative to the corresponding period of 2015. Among the components of actual consumption, household final consumption expenditure, the largest segment, increased by 4.5%. This is attributable to the personal income tax cut, the growth of disposable income and the low-inflation environment. Gross fixed capital formation decline by 8.8%. This continues to be attributable mostly to the declining level of EU-financed investment projects, which had the most severe effect on the investments of budgetary organisations. Consumption may continue to expand in the forthcoming period as a result of the minimum wage hike, the reduction in the number of vacancies and the lowering of social contribution rates.

Final consumption contributed 2.0 percentage points, and gross capital formation 0.4 percentage point to the 2.2% GDP growth in Q3 2016, whereas the foreign trade balance in aggregate slowed output growth by 0.2 percentage point.

According to the autumn forecast of the European Commission, Hungarian GDP is expected to grow by 2.1% in 2016. The continued growth of household consumption is promoted by strengthening consumer confidence, expanding retail lending and improving labour market conditions. As a result, the consumption of the private sector is likely to remain the main driver of economic growth. Investments may recover gradually in 2017 and 2018, supported by the accelerated draw-down of EU funds, the continued recovery of domestic consumption, the expansion of household investments and numerous large investment projects in the automotive industry. These will also trigger a growth in their vendor network, while investments of the SME sector may be promoted by the favourable interest environment. On the production side, the dynamic growth of market services and a favourable year for agriculture may also be conducive to economic growth.

The corporate profit tax rate has been reduced to 9% as of 2017, which may have a positive impact on the investment decisions of undertakings. It should be noted that in 2016 all three large rating agencies (Fitch, Standard & Poor's, Moody's) moved Hungary back into investment grade. In its December 2016 outlook , the Ministry for National Economy envisages economic growth of 4.1% for 2017, while the National Bank of Hungary (MNB) expects a 3.6% growth rate.

Growth continues to be intensive in Central and Eastern European countries, while the International Monetary Fund emphasised in its autumn report that the suppression of the black economy and increasing the efficiency of tax collection are prerequisites for continued growth. The growth of output was supported by the robust industrial output in Slovakia and the expansion of domestic consumption in the Czech Republic (similarly to Hungary). The IMF, the OECD and the European Commission forecast economic growth of at least 2.5% in all four Visegrád countries for the next year.

In H1 2016, the global economic growth was influenced substantially by concerns relating to the potential hard landing of the Chinese economy, the adverse effect of low oil and commodity prices on exporters and partly by the financing terms becoming more stringent for emerging countries due to the start of the tightening cycle in the US. Growth in the EU was supported by internal demand, while the contribution of investment remained modest.  US growth was attributable to expanding exports and growing inventory accumulation, which were able to offset the decline in household consumption. In China, retail trade turnover continued to grow intensively while industrial growth remained subdued. Substantial public expenditures and dynamic lending also supported the substantive growth of the economy.

In December 2016, the Fed and the ECB adopted monetary policy decisions reflecting different approaches. With its 25-basis-point rate increase, the Fed tightened monetary conditions for the first time since December 2015, while the ECB decided to extend its asset purchase programme, thus loose monetary policy will be sustained in the Euro area for a length of time. In line with the central bank's measure, the dollar appreciated vis-a-vis major currencies early in November.  Both the International Monetary Fund and the OECD expect EU economic growth to accelerate in 2017.

Global economic growth next year will be severely affected by the exact timetable of the exit of the United Kingdom from the European Union as well as the economic policy of the Trump administration. The IMF expects a global economic growth rate of 3.4% for 2017, while the OECD's expectation is 3.3%.

Development of Business Activity Indices
After its increase in November, GKI's business activity index continued improving in December. With the exception of stagnating expectations in services, each industry in the business sector showed higher optimism relative to the previous month. In the last month of the year the industrial confidence index continued its upward trend observed in November even though it had not reached its peak seen in the summer. The commercial confidence index improved perceivably, which was attributable to the improved perception of inventories and order books, while the assessment of sales positions deteriorated slightly.

In December 2016, all sectors, with the exception of construction, upgraded their employment plans; simultaneously, fears of unemployment among the population abated. Each sector expressed a growing intention to increase prices, most notably in trade and construction, and the perception of the position of the Hungarian economy also continued to improve.

Public Debt and Budget 
In 2016 the cumulative cash-based deficit of the central subsystem of the general government was HUF 848.3 billion as indicated by preliminary figures, HUF 389 billion less than in 2015. The central budget closed the year with a deficit of HUF 771.6 billion, the social security funds produced a deficit of HUF 75.2 billion and the extrabudgetary funds HUF 1.5 billion. The positive budgetary developments of 2016 reflect the favourable economic processes and the government measures to whiten to economy; the resulting higher tax revenues and the cyclical nature of EU funds all contribute to the stable budget position. HUF 490 billion more tax and contribution revenues were collected last year than in 2015.

In response to the positive developments underlying the budget, in December the Government decided to make available additional funds to certain economic actors; consequently, the deficit of the central subsystem amounted to HUF 907.6 billion in the last month of the year. Consequently, the fiscal deficit of 2016 calculated with the EU methodology may have been between 2.1% and 2.3% of GDP. According to the forecast of the Ministry for National Economy issued at end-December 2016, the fiscal deficit will remain consistently below 3% between 2017 and 2020. Also, fiscal policy provided more support to aggregate demand because the wage increase and the cuts of the corporate profit tax and social contribution rates increase household income and the profitability of undertakings.

According to the MNB's projection, the deficit of the government sector as a percentage of GDP may have been between 1.5% and 2.0% of GDP in 2016; this figure will be around 1.8-2.2% in 2017 while the baseline projection envisages a deficit of 2.0-2.2% for 2018. The central bank expects the declining trend of the gross public debt to GDP ratio to continue; consequently, the debt ratio may decrease to 73.5-74.0% by end-2016, then to go below 73% in 2017 and below 72% in 2018.

Inflation
Based on the figures of the Hungarian Central Statistical Office (HCSO), consumer prices in November 2016 were 1.1% higher on average than a year earlier. On the whole, food prices increased by 0.7% on average compared to November 2015; the price of sugar rose by 16.3%, while the prices of pork and eggs declined by 8.2% and 3.5%, respectively. Last year the prices of alcoholic beverages and tobacco products increased by 2.1% on average, prices of services by 1.8% and of articles of clothing by 0.6%. The price of household energy remained unchanged while the prices of durable consumer goods declined by an average of 0.8%.

In November the inflation report of the MNB for December 2016 envisages an inflation rate of 0.4% for 2016 and forecasts 2.4% for 2017; the rate of inflation may approach the medium-term inflation target of the central bank (3%) only in H1 2018. Based on the MNB's forecast, increases in the consumer price index will be driven by products outside the core inflation basked (in particular automotive fuel and market energy) in the forthcoming quarters, and by core inflation after mid-2017.

Hungary will face a moderate external inflation environment in the medium term as the rate of inflation of the Euro area, our most important foreign trade partner, will be around the medium-term target of the European Central Bank (2%). Because of the expansion of household consumption triggered by income growth, the MNB forecasts a gradual rise in core inflation adjusted for indirect taxes, reaching 1.3% in 2016 and 2.3% this year 2016 consumer prices increased by 0.1% on average relative to the previous month.

The harmonized index of consumer prices (HICP) calculated by Eurostat was 0.6% both in the European Union and in the Euro area in November 2016. The highest inflation was registered in Belgium, where its rate was 1.7%, while Bulgaria and Cyprus had the lowest inflation rate, with prices falling by 0.8%. Countries in our region continue to have low inflation rates on the whole; alongside Hungary, the Czech Republic (1.6%) and Slovenia (0.7%) had rates above the EU average. Poland, Romania and Slovakia had inflation rates around zero, the latter two producing a minimal deflation as registered by Eurostat.

Foreign Direct Investment (FDI) According to OECD's figures, in H1 2016 global FDI flow fell by 5% to USD 793 billion relative to H2 2015. In Q1 2016 foreign direct investment amounted to USD 513 billion, declining to USD 279 billion by Q2. In the April-June 2016 period the value of FDI inflow to the European Union declined in particular. Nevertheless, the value of investment into OECD countries increased by 14% in H1 2016 over the figure seen in H2 2015. The increase is attributable predominantly to the expansion of investment in the US and the UK; in the first six months of 2016 the value of investments in these two countries approximately trebled relative to the previous six months. Non-OECD G20 countries all registered a decline in H1 2016 (with the exception of Russia), the most notable drop experienced by South Africa (-45%) and China (-37%). In Russia the value of investments trebled over the low base of USD 3 billion, reaching USD 9 billion.

According to the expectations of UNCTAD published in October 2016, the global FDI flow in the whole of 2016 may have fallen by 10-15% to around EUR 1,500-1,590 billion. The decline re¬flects the fragility of the global economy, the weakness of aggregate demand, the slow econom¬ic growth of commodity exporting countries as well as the effective government measures to combat investments made for reasons of tax avoidance. Geopolitical risks and regional tensions also make investors wary. It should also be noted that after a rising trend of two years, in 2015 the profits of the 5,000 largest multinationals declined to the lowest level since the financial crisis of 2008-2009.

UNCTAD expects that the value of global FDI may increase in 2017, reaching around USD 1,600-1,720 billion, then rising to USD 1,730-1,880 billion in 2018. The international organisation found in its survey that the most attractive countries for investors are the United States, China, India, the United Kingdom and Germany.

Competitiveness 
The World Bank published its 'Doing Business 2017' at the end of October 2016. Based on the survey covering 190 countries, Hungary ranked 41st, having improved one notch since the previous survey. Apart from Hungary, the Czech Republic, Poland and Romania also moved up in the ranking while Bulgaria, Slovakia and Slovenia ranked lower than in the previous year. The World Bank's Doing Business 2017 ranking is based on ten major topics: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, resolving insolvency and enforcing contracts. Hungary performs outstandingly among the 190 countries in terms of trading across borders (1st place), credit terms (20th place) and the enforcement of contracts (8th place).

Foreign Trade
Hungary's total exports of goods reached EUR 90.46 billion in 2015, which represents a 7.0% increase compared to EUR 84.51 billion in 2014. After a 4.6% increase, Hungary's imports of goods amounted to EUR 81.86 billion last year. Due to the stronger growth of exports, Hungary's foreign trade surplus increased by 37.0% to EUR 8.6 billion compared to a surplus of EUR 6.27 billion in 2014. In January to October 2016, Hungary's foreign trade turnover increased by 1.6% and reached EUR 146.26 billion. In the first ten months of this year, Hungary's exports increased by 2.4% to EUR 77.4 billion, while Hungarian imports reached EUR 68.86 billion after an increase of 0.7% compared to the same period in 2015. In January to October 2016, Hungary's foreign trade surplus was EUR 8.54 billion, which represents a 19.0% increase compared to a surplus of EUR 7.18 billion compared to the same period in the previous year. In the first ten months of 2016, Hungary conducted nearly four-fifths of its foreign trade with the countries of the European Union. In the case of exports, 79.8% of the goods went to EU countries, while in the case of imports this proportion was 78.3%.

The dominance of our most important trade partner, Germany, still remained: 27.9% of Hungary's total exports targeted Germany, while goods from that country accounted for 26.7% of Hungary's total imports. In respect of exports, Germany is followed by Romania and Austria with a share of 5.0% and 4.8%, respectively, with corresponding volumes of EUR 3.88 billion and EUR 3.73 billion. In the case of imports, Hungary's second largest partner is Austria with a share of 6.4% and a volume of nearly EUR 4.44 billion, while the third place is occupied by Poland with a share of 5.5% and a value of EUR 3.81 billion. Our largest non-European export partner was the United States with a share of 3.3% and volume of EUR 2.55 billion, while in terms of imports China was our largest non-European partner with its share of 5.3% and value of EUR 3.66 billion.

Hungary's product-level foreign trade is dominated by products related to the manufacture of transport equipment. Of the five most important products, three belong to this sector in respect of both exports and imports. In the first ten months of this year, Hungary's most important export products were passenger cars and other transport equipment. Their exports reached EUR 8.5 billion and accounted for 10.9% of Hungary's total exports of goods. Parts and accessories for transport equipment take the second place, while the third most important export products were spark-ignition internal combustion engines. The volume of the former was EUR 4.6 billion with a share of 5.9%, while that of the latter was EUR 2.7 billion with a share of 3.5%. In January to October 2016 our country's most important import products were parts and accessories for transport equipment, which accounted for 6.0% of total imports, with a volume of EUR 4.15 billion. This was followed by passenger cars and other transport equipment with an import volume of EUR 2.1 billion (with a share of 3.1%), while the third place is taken by fixed-line and digital telephones with a value of EUR 2.0 billion (with a share of 2.9%). It should be noted that medicaments took fourth place both in terms of export and import, their value being EUR 2.5 billion (3.2%) for exports and EUR 1.96 billion (2.8%) for imports.

Employment
According to the figures of the HCSO, the total number of employees was 4,414,000 in September to November 2016, which is 142,000 (3.3%) higher than in the same period of the previous year.

The number of employed persons included 4,076.0 thousand persons working on the domestic primary labour market, 220.8 thousand public work scheme participants, and 117.6 thousand persons working abroad. The domestic primary labour market contributed to the growth with 152.6 thousand employees.

In September to November 2016, 4,364,100 people of the age group of 15 to 64 years, which represents a population of 6,466,100 were employed. Their employment rate increased by 2.5 percentage points to 67.5%.  In Q3 2016, the largest employer in the industrial sector, the manufacturing industry, employed 952,800 persons, and trade and motor vehicle repair, outstanding among services, employed 550,000.

According to the labour force survey data of the Hungarian Central Statistical Office among the population, the number of employees in the processing industry increased by 48,000 in aggregate compared to the same period of the previous year, mainly due to a 25.3%, 14.8% and 8.2% increase in employment taking place in the sectors of the manufacture of electrical equipment (13,100 persons), the manufacture of computers, electronic and optical products (11,100 persons); and the manufacture of transport equipment (11,800 persons), respectively.

Unemployment
The increase in the number of employees was accompanied by a further decrease in the number of unemployed. According to the figures disclosed by the HCSO, between September and November 2016 the average number of unemployed persons (as defined in the labour force survey) was 208,000, 76,000 less than one year before. The unemployment rate fell by 1.7 percentage points to 4.5%.

In Q3 2016, in a breakdown by the economic branch or sector of their previous jobs, the number of unemployed with less than eight years of work experience decreased by 29.6% (19,300 persons) in the industrial sector, 32.2% (6,900 persons) in the construction industry and 15.1% (20,700 persons) in the services sector compared to the same period of the previous year. By contrast, 8.6% (700 persons) more unemployed were registered among those with work experience in the agricultural, forestry and fisheries sectors.

As indicated by the figures of the National Employment Service, by end-November 2016 the number of registered job seekers decreased by 22.0% (by 77,032 persons) to 273,507 persons year-on-year. Compared to the previous month this year, the number of registered job seekers decreased by 4,264 (1.5%).

According to Eurostat's seasonally adjusted figures, the average unemployment rate was 9.8% in the Euro area, 8.3% in the whole EU (28 Member States) and only 4.6%  in Hungary in November 2016. The 12.0% unemployment rate of the Hungarian population below 25 years of age is also better than the 18.8% EU average: the Eurostat registered youth unemployment of 21.2% in the Euro area, 44.4% in Spain, 46.1% in Greece, and 39.4% in Italy. In the EU-28, both the unemployment rate and the rate of youth unemployment (among persons below 25 years) decreased by 0.7% year-on-year in November 2016.

Wages, Salaries
In January to October 2016, gross average earnings increased by 6.0% on a year-on-year basis. The increase resulted, inter alia, from the 5.7% raise in the minimum wage and the guaranteed wage minimum as well as the increase of salaries in the armed forces and the supplementary benefit paid to employees in social fields. The net earnings rose by 7.6% due to a 1-percentage- point decrease in the personal income tax rate. The average gross pay of full-time employees was HUF 258,300 at the level of the national economy. The average gross earnings were the highest in the economic branch of financial and insurance activities (HUF 511,700) and the lowest in the area of human health care and social care (HUF 151,700). The average net pay (calculated without the family tax allowance) was HUF 171,800 at the level of the national economy. Without the average pay figures of public work scheme participants, wages and salaries increased by 6.4% in the national economy, and within that, by 5.3% in the business sector. In the first ten months of 2016 the average monthly gross earnings of public work scheme participants working full-time was HUF 78,800, representing a 1.3% decrease year-on-year.

In the first seven months of 2016, the average gross monthly income from work was HUF 271,600 at the level of the national economy, within which the proportion of other income from work accounted for 4.9% on average.

Labour Costs and Minimum Wage
In 2017 the rate of the social contribution tax payable by employers has been reduced from the 27% in 2016 to 22%, to be further reduced to 20% in 2018. Tax allowances are available in the instances specified in law, such as in respect of persons employed in positions not requiring special qualifications, participants of the Carrier Bridge programme, entrepreneurs with altered working capacity, employees below 25 or above 55 years of age, long-term job seekers, recipients of child care benefits, entrepreneurs and researchers operating in free enterprise zones. The allowance is calculated monthly based on gross salaries but not exceeding HUF 100,000 per person per month (in the case of researchers, HUF 200,000 or 500,000 per person depending on their academic degrees), at the rate of the effective social contribution tax or 50% thereof.

Contributions payable by employees have not been changed as of 2017; the pension contribution remained 10%, the in-kind health insurance contribution 4%, the cash health insurance contribution 3%, and the labour market contribution 1.5%.

While in 2016 the minimum wage and the guaranteed wage minimum, for employees working in position requiring at least secondary school or secondary vocational qualifications increased by 5.7%,  from 1 January 2017 the minimum wage for full-time employees has been increased by 15% to HUF 127,500 (from HUF 111,000), and the guaranteed wage minimum of persons employed in positions requiring at least secondary vocational qualifications by 25% to HUF 161,000 (from HUF 129,000).

In addition to the social contribution tax, employers are also required to pay a vocational training contribution, at the rate of 1.5% of the vocational training contribution base. The base of the vocational training contribution, which is the same as the base of the social contribution tax, may be reduced by the gross wage of persons employed with the conditions and in the scope specified in law up to the amount of HUF 100,000/month/person (for instance: career starters, long-term job seekers, recipients of child care benefits, new employees working in free enterprise zones). The gross wage of those researchers in respect of whom the employer makes use of a social contribution tax allowance may also be deducted from the base of the vocational training contribution (up to HUF 500,000/person/month).

The vocational training contribution requirement may be also met, up to the state-subsidised number, by providing practical training in the framework of work experience schemes, under a student work contract or cooperation agreement with vocational training schools or a student contract concluded with a student of a vocational school. Employers meeting the vocational training contribution by way of providing practical training may reduce their gross payment obligation with an amount calculated based on the practical training normative amounts, in accordance with the basic normative amount specified in the central budget for the year.  The basic normative transfer specified in the central budget is HUF 453,000/person/year in 2017. Undertakings participating in work experience schemes may reduce their vocational training contribution substantially in 2017. The deduction is the normative transfer per day multiplied by the number of training days spent at the undertaking. In 2016, the daily amount of the practical training normative transfer applicable to companies participating in the organisation of practice-intensive bachelor-level education must be calculated by dividing the basic normative transfer by 100; the same applies to work experience schemes. From 1 January 2017, the daily amount of the practical training normative transfer per student must be calculated by dividing the basic normative transfer (HUF 453,000) by 75 in the bachelor-level social worker education and in economic sciences, and by 56 in the field of technical, IT, agricultural and natural science education, thus the normative transfer per day (instead of HUF 4,530/day/person) is HUF 6,040/day/person or HUF 8,089/day/person, respectively.

Education and Qualifications
As of 1 February 2017, of the 66 state-recognised institutions of higher education, 29 are classified as universities, 7 as universities of applied sciences and 30 as colleges; these institutions of higher education are listed in Annex 1 to Act CCIV of 2011 in national higher education. Pursuant to the law, universities are entitled to provide education in at least eight bachelor and six master programmes, while the requirement for universities of applied sciences is at least four bachelor and two master-level programmes. If the authorisation of the latter covers the educational fields of technology, IT, agriculture, natural sciences or economic sciences or social work programmes, it may also offer work experience schemes in at least two programmes.  Work experience schemes are becoming increasingly common in Hungarian higher education. The range of Hungarian institutions of higher education offering work-experience schemes and of their partner undertakings has been expanding since the introduction of the scheme in 2012. In the 2016/2017 school year, 24 higher education institutions offer work-experience schemes in 41 bachelor and 11 master programmes, with the involvement of 593 partner organisation.

In the territory of Hungary, 29 authorised foreign higher education institutions were allowed to provide higher education services on 1 December 2016.

Source: HIPA (Hungarian Investment Promotion Agency)