Can Hungary sustain growth?

Consumers in Hungary are among the more prosperous of the "new" countries to join the European Union (EU). The International Monetary Fund says that Hungary's per capita income will reach US$16,338 in 2005. Per capita income for the first five years of the past decade was $10,844. And for the second five years of the decade was $14,668.

Hungary joined the EU in May 2004.

Since that time economic progress has been swift and solid. Average growth in GDP for the decade was 3.8 percent.

The government had a struggle with inflation, but has managed to get it partly under control. The average annual growth in the rate of inflation for the first five years of the past decade was 15.1 percent. For the second five years of the decade the average annual growth in the rate of inflation is 6.1 percent, a considerable achievement.

On July 18, 2005, the Associated Press (AP) reported that Hungary's central bank cut its benchmark lending rate by a quarter percentage point. The AP said that the bank's main reason for doing so was that the data on inflation was "favorable". The bank said the rate of inflation in June slowed to 3.8 percent.

The bank expressed concern, though, that tax cuts could jeopardize the promising inflation picture.

A day after the bank's announcement, the Organization for Economic Cooperation and Development (OECD) published its 2005 "Economic Survey of Hungary". In the review, the OECD acknowledged Hungary's recent pattern of fast growth, but it pointed out that much of it appeared to be artificial.

The vigorous spending posted by Hungarian consumers - central to GDP expansion - was created by minimum wage hikes and high levels of government spending.

This sounds a great deal like the caution the central bank attached to its recent rate cut. And it indicates that unless the Hungarian economy takes the advice of the OECD and concentrates on investing in productivity enhancements in the manufacturing sector, skill-building for its workforce, and service sector job creation also with an emphasis on productivity, the fast growth ambitions Hungary has set for itself may not be sustainable.

STRUCTURAL REFORMS AND JOB CREATION WILL HELP HUNGARY GROW

The population growth rate for Hungary is slightly below the regional average, due in part to a birth rate of 9 per thousand inhabitants, which is lower than the average of 10 per thousand for Eastern Europe. Job creation has not kept up with growth of the labor force in recent years, and it is unlikely that the situation will improve further in 2005. Unemployment is running about 5.9 percent, and this continues to undermine consumer confidence.

Hungary's population reached 10-million people mid-2004, which amounted to just 3.3 percent of Eastern Europe's 299- million inhabitants. According to data released by the Population Reference Bureau (PRB), Hungary's population will fall to 9-million by 2025. Also, according to that source, Hungary is going to have a population of 8-million people in 2050.

The PRB revealed that a substantial 65 percent of Hungary's population lived in urban areas during 2004, and that the country's population density is a comparatively moderate 335 people per square mile. In land area, Hungary is almost exactly the same size as Portugal. The two countries also have nearly identical populations. Portugal's rural population is higher, though. Another source of demographic data, the CIA's World Factbook, indicates that 16 percent of Hungary's population was birth to 14 years old in 2004, while 59 percent was 15 to 64 years old, and 15 percent of the populace was 65 years of age and over.

CIA statistics revealed that the country's population growth rate was negative 0.26 percent in 2004 and the net migration rate was 0.86 per thousand.

According to the United Nations Population Division, in the year 2050, 14 percent of Hungary's population will be birth to 14 years old, while 50 percent will be aged 15 to 59, and 36 percent of the populace will be 60 years of age and over.