Hungary: Different headwinds imply more prolonged economic weakness

Following the weak 1Q 2025 GDP figures, we reduced our 2025 forecast for annual GDP growth to 0.8%. Investments will continue to decline amid increased uncertainties, partly stemming from tariff risks. In the absence of improvement in external demand, export activity is set to remain sluggish. However, household consumption may remain the main growth driver. In 2026, new production capacities will boost growth, while we expect a gradual recovery in investments and exports. Inflation stood at 4.4% y/y in May, while core inflation was at 4.8% y/y. Although these figures are lower than at the beginning of the year, they remain above the tolerance range despite administrative price-curbing measures and a sluggish economy. The short-term outlook is rather mixed: some factors point to disinflation, but the unsupportive base effect is likely to keep the headline rate above 4% approximately until the end of the year. The 12-month rate may reach the target range in the first half of 2026.

Reaching the ambitious fiscal targets requires maintaining the primary balance. This could be challenging, however, as the general elections approach in 2026, thus some deterioration is anticipated. High nominal GDP growth is supportive, but pre-election measures would constrain efforts to keep public debt on a declining trajectory in 2025 and 2026. The policy rate has stood at 6.50% since 3Q 2024. A disciplined anti-inflationary stance and stability-oriented approach by the MNB do not suggest the start of rate cuts for the time being. However, we see potential for one or two cautious interest rate cuts towards the end of the year, provided that inflation prospects and the country's risk perception do not deteriorate, and if the US Fed restarts its easing cycle in the autumn. With some easing of tensions over the tariff war, the forint corrected to the stronger side, stabilizing between 400-405 against the euro. However, the inflation differential and persistent productivity challenges point towards a slow weakening, which keeps the Hungarian currency on a continuous devaluation path against the euro in the medium term.   

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