Will the Hungarian growth miracle start next year? Economists say not to bet on it

2024 has been an eventful year, with a number of events in the global and domestic economy. This year, the expected growth miracle did not happen and the interest rate cut cycle came to an early end. But looking at the forecasts for next year, it is easy to think that the hard times are behind us and that only better years lie ahead.

But what are the positive and negative risks? - we asked analysts. The negative risks that analysts see as the most important are outlined in this article. Those who contributed:

• Orsolya Nyeste, Senior Macroeconomic Analyst at Erste Bank;
• Zoltán Árokszállási, Senior Analyst at MBH Bank;
• Péter Virovácz, Senior Analyst at ING Bank.

Geopolitical risks materialise

According to Zoltán Árokszállási, most of the risks could come from outside next year.

Out of these, it is the escalation in the Middle East and the subsequent energy price explosion that could cause an inflationary shock and a pullback in the real economy.

According to the MBH Bank analyst, the possibility of a new conflict erupting in the world (similar to the ongoing Russian-Ukrainian conflict, e.g. on the eastern side of Europe or in Taiwan) cannot be ruled out. Furthermore, the geopolitical risks include the unforeseen effects of climate change, which could also cause a food price explosion.

Orsolya Nyeste also highlights energy shocks as a potential risk factor. In her view, a possible further escalation of the geopolitical situation will lead to a significant increase in oil and gas prices. Rising energy prices will again worsen the balance of payments, rising energy bills in the corporate sector will undermine growth and raise inflation.

Péter Virovácz sees the problems of the European Union as a risk that could also harm the prospects of the Hungarian economy.

The ING analyst presents a scenario where both the German and French political situations bring prolonged uncertainty for European consumers. Without potent core leaders, the European Union will be in "lame duck" mode in 2025. The EU will become a two-speed economy, where countries that rely on services do well, but countries that depend on industry continue to decline. The current inventory cycle will be prolonged, order books will fall further, and industrial companies will stop investing indefinitely. This is an attempt to cut costs and survive. Of course, the region and our country cannot escape this process.

Virovácz also sees further problems in the EU. Europe's already crackling and crunching economy is collapsing under the weight of the mounting challenges of the poly-crisis. Structural changes impose increasing investment demands on EU member states, which they are unable to meet because of political, fiscal and monetary policy constraints. Europe will fall spectacularly behind the US and China in 2025. Geopolitical tensions are heightened by the real threat of a US withdrawal from NATO, and Russia's offensive is gaining momentum. This will push Europe into a recession of such magnitude that Hungarian exports will collapse.

Trade war escalates

According to Árokszállási, there is a chance that the tariff war could escalate, which would obviously limit the opportunities for Hungarian exports.

Given the deterioration in market sentiment and the expected depreciation of the forint, we should expect higher interest rates, lower consumption and investment than currently expected. According to MBH Bank's analyst, further uncertainty could arise if Donald Trump delivers on his promises. The newy elected US president has announced the imposition of significant tariffs, but it is not certain that these will actually materialise in the extreme form announced. If they do, there is a strong possibility of a global trade war in 2025, with all the confidence and growth-destroying effects that would be particularly damaging for the already fragile European recovery.

Virovácz also highlights the negative side of the Trump effect, which could hit Hungary on the investment side. In his view, a more aggressive than expected, non-consensus seeking Trump tariff policy will create an investment divergence. Large companies are turning away from Europe, and industrial production continues to decline on the old continent. Factory closures and rationalisations are also reaching East-Central Europe. The workforce that has been in reserve will no longer be needed, leading to a major wave of redundancies. This will also lead to the cancellation or suspension of ongoing and planned investment projects, i.e. a real recession scenario with a combined collapse of external and internal demand.

There will be trouble in the USA

Árokszállási does not ignore the possibility of a US recession. In his view, it would start like this summer, when suddenly very weak US labour market data came to light, only this time the fears are real, with the US economy falling into recession.

Orsolya Nyeste, on the other hand, is worried about US inflation. With core inflation seemingly stuck above 3%, she says that not everything is quite right with inflation in the US either. Inflation in market services remains high, thanks to relatively high inflation in housing, health and leisure services. In any case, baseline forecasts call for a slowdown in inflation by 2025, as the expected slowdown in the economy could also cool inflation in the coming months, bringing it closer to the 2% the Fed wants to see. However, the tariffs that president-elect Trump has promised pose an additional upside risk to inflation, the impact of which is difficult to assess at this stage. Moreover, even if the economy does not slow down as much as now expected, core inflation could remain persistently high. Stuck inflation will also prompt the Fed to change its interest rate policy, in which case we can probably forget about further rate cuts.

Hungarian inflation takes flight or the real economy falters

The Erste analyst says that external risks are not the only concern for the coming year. A potential source of trouble could be a bounce in domestic inflation. For most of this year, inflation has been in the central bank's target range, and the cooling of inflation after the extreme inflation environment of 2022 and 2023 was a major bright spot for 2024. However, upside risks to inflation have not disappeared. On the downside, food inflation is set to resume and the forint is stabilising in a weaker band, with revenue-increasing fiscal policy measures having an additive inflationary impact. Expectations are also not well anchored and, moreover, they seem to be rising again recently. It is questionable to what extent these factors will lead to an increase in the intensity of repricing in 2025, especially if a possible faster pick-up in consumption also adds to demand-driven inflationary pressures.

Besides inflation, the absence of fiscal consolidation, which could be followed by negative ratings, would also come as a negative surprise. The planning fundamentals for the 2025 budget are significantly more stable than we have seen in recent years, although there is a sense of "treasury optimism", most notably around the 3.4% GDP growth and 3.2% inflation projections. Thus, the 3.7% of GDP accrual deficit target is also rather ambitious. An additional risk could be that the planned deficit reduction could conflict with the planned stimulus measures, which could easily lead to a further deterioration in the primary balance next year. This, coupled with possible further problems with the receipt of EU funds, could lead to negative rating actions next year, which could increase the financing burden on the economy through a rise in the risk premium.

Péter Virovácz also sees risks related to the development of consumption.

In his opinion, despite the dynamic rise in real wages, consumer confidence is still failing to recover in any meaningful way, regardless of the targeted measures taken by economic policy. The renewed weakening of the forint and higher-than-expected monthly inflation at the beginning of the year, especially for goods and services that affect perceived inflation, are again eroding consumer confidence. As a result, the 2025 payments on retail government bonds will be absorbed not in consumption but in domestic, or worse, offshore savings. The latter eventuality would not only significantly worsen growth prospects but also the country's debt financing position.

A "black swan" event might also be on the horizon

Virovácz does not completely rule out a black swan event.

This means Europe putting aside its internal divisions and making meaningful progress on the Critical Raw Materials legislation, the Strategic Compass Action Plan and the Green Deal Industrial Plan. Through these, Europe could rapidly begin to reduce its external dependencies and, as a result, take up the gauntlet against protectionist measures by the US and China. All this would eventually lead to a full trade war, with households being the biggest losers in the short term as European (and Hungarian) inflation soars yet again.

Cover photo (for illustration purposes only): Getty Images