Hungary’s Economic Outlook

Hungary’s economy is facing a subdued outlook for the short term, following a weaker-than-expected start to the year. The country’s GDP growth is forecast to be around 1.0% for 2025, with a potential recovery of 3% expected for 2026-2027. However, this recovery is likely to be modest, and downside risks persist.

Current Economic Conditions

Household and business confidence in Hungary remains low, which is restraining consumption and investment. Despite this, consumption is expected to remain the main driver of GDP growth, while investment activity is likely to hinder growth for the third consecutive year. The labour market, which was once resilient, has now softened, with participation and employment rates at their lowest levels in two years.

Labour Market and Inflation

The labour market slowdown has also led to a decrease in wage growth, although it remains high enough to create pipeline price pressure, especially in the services sector. As a result, price pressures in the Hungarian economy remain elevated, with year-on-year inflation sitting at 4.6% in June. This is expected to continue, with an average inflation rate of 4.6% forecast for 2025, before returning to around 4% in 2026-2027.

Monetary Policy

The National Bank of Hungary has kept the base rate at 6.50% for the ninth consecutive month, amid ongoing inflationary pressures. The central bank believes that inflation risks are tilted to the upside, and it is likely that the policy rate will remain unchanged for the rest of the year. This decision is aimed at controlling inflation and supporting the economy, but it may also have implications for the country’s borrowing costs and currency value.

Government Financing and Currency

Despite the challenging economic conditions, demand for Hungarian assets remains robust, supporting government financing. However, the deficit target has been revised upwards to 4.1% of GDP in 2025, and there is a risk of further slippage. The forint has recently rallied, but it is likely to experience mild depreciation later in 2025, as the weaker economic outlook and budgetary and sovereign rating risks become more prominent. As a result, the EUR/HUF exchange rate is expected to crawl back to around 410 by the end of the year.

Conclusion

In conclusion, Hungary’s economy is facing significant challenges, including low household and business confidence, a softening labour market, and elevated inflation. While the National Bank of Hungary is taking steps to control inflation, the country’s economic outlook remains subdued, and downside risks persist. The government’s decision to revise the deficit target upwards and the potential for further slippage may also have implications for the country’s borrowing costs and currency value. Overall, it is essential for policymakers to carefully manage the economy and implement policies that support growth and stability.