Analysts share their forecasts for the Hungarian economy in 2025

Outset - elections, economic growth, inflation

As a keynote speaker, István Madár (Portfolio) presented his introductory thoughts on the state of the Hungarian economy. According to his assessment, the growth prospects of the Hungarian economy in the near future are currently determined by two main choices, namely the new trade policy realities brought about by the economic policies of the newly inaugurated US President and the expected economic policy implications of the upcoming Hungarian elections in 2026. Recently, the Hungarian Central Statistical Office (KSH) published its first estimate of GDP growth in 2024, showing that GDP growth in the fourth quarter of 2024 was 0.5% on a quarter-on-quarter basis, seasonally adjusted, and that the Hungarian economy has exited the technical recession.

He pointed out that a significant pick-up in economic growth (to 1.3%-1.4%) on a quarter-on-quarter basis is needed to achieve the government's economic growth target of 3.4% in 2025. There are also restraining forces on investment, consumption and exports that are slowly unwinding at very different speeds for different GDP consumption items. For two years, macroeconomists have been predicting the start of a dynamic recovery in Hungarian economic growth, which is still a long way off, although the scope for economic policy is much narrower now than it was in the pre-pandemic period. The question arises: is the Hungarian economy finally out of recession? What kind of dynamism can we envisage for the Hungarian economy in 2025?

The Forecasters' Forum was attended by four macroeconomic analysts and experts: András Balatoni (Director of Economic Forecasting and Analysis at the National Bank of Hungary [MNB], Member of the Board of the Economic Policy and Economic Theory Section of the MKT), Éva Palócz (CEO of Kopint-Tárki, Vice President of the MKT), Gergely Suppan (Deputy State Secretary for Macroeconomic Analysis at the Ministry of National Economy) and János Nagy (Macroeconomic Analyst at Erste Bank). The panel discussion was moderated by István Madár (chief analyst at Portfolio, member of the MKT Board).

The other recent macro data that has recently caused a negative surprise among macro analysts was the January inflation figure. In its December 2024 inflation forecast, the MNB published a 3.7% (+/-0.4%) mid-band point forecast for inflation in 2025, which now turns out to have been exceeded. A key question is whether the higher-than-expected inflation in January (5.5%) is a "long shadow" of the 2022-2023 inflation period, or whether new factors are behind the renewed acceleration of inflation, which requires new economic policy interventions.

Economic growth, consumption, investment, net exports, labour market: could the Hungarian economy slip back into recession in 2025?

According to András Balatoni, last year's performance of the Hungarian economy was heterogeneous in terms of GDP shares. On the consumption side, the Hungarian consumption trajectory is moving in line with the consumption recovery trajectory of higher growth countries in the East-Central Europe region, which could provide a dynamic for economic growth. As regards the additive consumption stimulus of Premium Government Bond (PMÁP) retail interest payments pointed out that, due to the reversal of the real value of savings, it may represent only a small additive consumption impulse.

In contrast to consumption, the outlook for Hungarian industry and foreign trade is unfavourable. This is the first time since the 1989 fall of communism that there have been two consecutive years of declining industrial production. With two-thirds of Hungarian industrial production being exported directly, this shows that the absorptive capacity of our external markets is very weak.

Investment volumes reflect the weak external environment and low capacity utilisation. The exception is greenfield investment, which can provide a significant boost to subsequent export volumes and investment volumes. The business surveys show that the first three factors include high prices, which, according to the companies surveyed, are a major constraint on investment growth. The result of these developments is that the Hungarian economy has not been able to grow significantly over the past 2.5 years, which could have an impact on its medium-term growth potential.

János Nagy, Erste's macroeconomic analyst pointed out that the main problem with the confidence indicators is that there is no improvement in the indicators on either the consumer or the business side. According to the business surveys, the focus of action of the surveyed employers is not on investment and capacity expansion, but on labour hoarding. Erste Bank's optimistic scenario for economic growth in 2025 is 2%, but the forecast reflects considerable uncertainty in both directions. The 2% Hungarian economic growth forecast could be significantly negatively affected by the spill-over of potential German industrial job cuts through the supply chain.

On the question of the importance of internal cyclical factors in growth, he pointed out that nearly 40% of Hungarian foreign trade, including re-exports, is directed to Germany. In other words, it is not the robustness of the internal but the robustness of the external business cycle that fundamentally influences the business confidence indices. On domestic demand, he pointed out that

the expected pick-up in the housing market is more likely to be driven by an increase in sales rather than new housing starts,

so the multiplier effect of this on the construction sector may be moderate.

Real wage growth will not be as strong this year as originally assumed, as retail and service sector price increases have intensified and household inflation expectations have increased from July 2024, according to the MNB's January assessment). Two years of stagnant economic growth are limiting profit levels, which will also be reflected in lower wage dynamics, which could result in consumption dynamics lower than the assumed 4% in 2025.

Regarding the development of investment and GDP, the CEO of Kopint-Tárki Economic Research Ltd, Éva Palócz stressed that public investment was drastically postponed in 2024, with the volume of investment falling by up to 25%. She pointed out that public investment represents 20% of investment in the national economy, which already has a significant impact on GDP. According to the quarterly business survey of Kopint-Tárki, 50% of the surveyed manufacturing companies do not plan to invest, which is an exceptionally high figure, but the first estimate of GDP for the fourth quarter of 2024 may suggest that the steep fall in investment may have stopped.

The results of the Kopint-Tárki business survey also show that the main growth constraint for companies is currently not a lack of financing but a lack of demand. Consumption in 2025 could grow at a similar pace to 2024 (c. 3.5%), supported by real wage growth. Consumption is held back by the consumption-diversion effect of cross-border shopping tourism, and actual consumption growth could be even higher than shown if consumer purchasing power did not leak abroad.

Kopint-Tárki's GDP forecast for 2025 is 2.4%, but incorporating information from the period since publication, the current GDP growth range is around 1.8-2.5%. Éva Palócz stressed that the weak German economic situation is not the sole and exclusive cause of the low growth of the Hungarian economy, as domestic cyclical factors also play a significant role. She cited the lower-than-expected growth in the services sector's output in 2024 as a further example of the role of internal economic drivers. The services sector's output is 90% domestic, but it has not recorded dynamic growth in 2024 (c. 2%) despite significant real wage growth.

According to Deputy State Secretary for Macroeconomic Analysis at the Ministry of National Economy Gergely Suppan, tourism, hospitality and air transport were the top performing sectors in 2024. However, the growth in these sectors was not able to offset the decline in other sectors (industrial production, agriculture). Agriculture made a negative contribution to last year's GDP growth due to the drought, mainly due to a decline in the volume of arable crops (wheat, maize). The production volume of arable crops is mainly influenced by rainfall, which cannot be predicted.

Turning to GDP consumption, on investment, he noted that a technical correction could take place in the fourth quarter of 2024, as the level of investment may have already reached a low point from which growth is needed to replace depreciation. The government also intends to act on investment by stimulating residential real estate investment (21-point Action Plan).

On corporate lending programmes, he underlined that in the current economic situation, energy efficiency investments are justified rather than capacity expansion investments. Hungarian SMEs are lagging behind in energy efficiency, which played a crucial role in the 2022-2023 inflation episode (see András Balatoni - Péter Quittner: A 2021-2023 közötti inflációs hullám okai és háttere [The causes and background to the 2021-2023 inflation wave], Közgazdasági Szemle, June 2024, pp. 671-689.). He stressed that the Demján Sándor Business Loan Programme (1+1 Programme, Capital and Housing Market Programmes, SME Digitalisation Programme) provides a source of financing to stimulate SME investment.

He expects consumption to grow by 3.5-4% in 2025, but said that retail sales growth will fall short of expectations due to a pick-up in tourism and services purchases abroad. In addition to real wage growth, Premium Hungarian Government Bond (PMÁP) interest payments could contribute to further easing of the consumer cautionary motive through the wealth effect. The carry-over effect is zero in 2025, but the agricultural base effect, PMÁP interest payments, and the pick-up in real estate investment could be positive economic momentum to prevent the Hungarian economy from slipping back into recession, but without a pick-up in German growth, achieving economic growth above 3% in Hungary is not possible.

German-Hungarian industrial relations, EU transfers, large investments: how strong is the long-term growth of the Hungarian economy?

Gergely Suppan said that the outcome of the upcoming German election could also have a significant impact on Hungary's GDP, adding that the new German government is expected to relax the current strict debt brake rules and to stimulate the economy with fiscal measures. On the competitiveness of the German economy, he said that it faces a significant structural problem due to a backlog of infrastructure investment. The German car industry has so far been able to sell almost 1/3 of its sales in China, but car sales in China are currently in decline. In China, competition in the domestic market has become very strong, i.e. while in the 1990s 2-4 million passenger cars were produced annually, this figure has now reached 32 million, squeezing out competing Western and Japanese car manufacturers not only from the Chinese market but also from the whole Far East. The same crowding-out effect is also taking place in the solar panel market and in the steel industry.

In this respect, the already announced US safeguard tariffs will also have a negative impact on European competitiveness, as Chinese goods are expected to try to find a market in Europe. The competitiveness problem for the German car industry is exacerbated by the entry into force of fleet-level CO2 emission quotas from 1 January 2025, which are expected to lead to tens of billions of euros in penalties for European car manufacturers if they fail to bring their CO2 emissions below the limit.

There are already forecasts for the German economy that predict a recession for this year (if this happens, it would be the third recession year in a row in Germany). He stressed that

the government's growth target can be achieved by gradually bringing automotive gigafactory production capacity into production from the second quarter of 2025, but this requires sufficient demand to absorb the excess emissions from these car plants.

András Balatoni pointed out that if production starts in the second half of 2025 in the three complexes, this could raise the annual GDP growth rate by an average of 0.6% in 2025, when the major investments (BMW, BYD, CATL) will be put into production. In the third quarter of 2025, the MNB estimates that 7,500 people will start working in the three complexes, which will increase to nearly 24,000 in 3 years (see the MNB's inflation report for Q4 2024). The MNB expects a significant pick-up in economic growth in the second half of this year, driven by the start of production at the three factories and the expected recovery in the Western European economy.

On long-term growth, he stressed the importance of producing competitive products and services. In order to boost economic growth, Hungarian companies with exportable products or services are needed, the lack of which limits the market growth potential of the Hungarian economy. The lack of exportable Hungarian companies puts pressure on economic policy to generate growth.

Growth pressures combined with inappropriate economic structures lead to stop-go cycles and hysteresis, ultimately leading to even slower economic growth.

In his comments on long-term economic growth, János Nagy pointed out that the planned ramp-up of production expected from large investments (BMW, BYD, CATL) (timing effect) and the long-term sustainability of demand for manufactured products (volume effect) is also questionable, partly due to regulatory risks. On these, he highlighted that regulation has driven electrification demand in the automotive industry so far, but the new US administration has reversed this, which may call into question the previously assumed growing industry demand trend and narrative of a rapid ramp-up in production. On the current weak economic situation in the German economy, he noted that the Bundesbank's weekly activity index showed signs of a rebound in the first quarter, but that this was not yet a clear sign of a turnaround.

Regarding long-term growth, Éva Palócz pointed out that EU transfers were a predictable and stable element of Hungarian economic growth in 2013-2019, but this is now missing. The additional GDP growth surplus from EU subsidies could reach 1-2% per year on an output share basis (see the study EU források gazdaságfejlesztési és növekedési hatásai [The economic development and growth impact of EU funds], by Hétfa Kutatóintézet, 2015.11.30.). The lack of EU transfers is reflected in the current low growth dynamics. She argues that long-term growth potential can be increased if investments financed through low-interest corporate loan programmes are geared towards improving the technological efficiency of production systems, in addition to energy efficiency.

Regarding competitiveness, she noted that in Hungary, the economic policy of state intervention is intensively present in the economy, but the state's role in stimulating the economy would be optimal if it were limited to creating favourable conditions (tax system, infrastructure development) for companies to grow.

Inflation, forint exchange rate, price caps, sectoral competitiveness: could the period of high inflation return in 2025?

According to Gergely Suppan, inflation is currently driven by opposing effects. He stressed that supply shocks are usually the main cause of inflationary episodes around the world, but supply shocks are unpredictable. Regarding his inflation forecast, he indicated that he expects inflation to fall after the January peak, supported by some base effects (lower backward repricing of services prices, higher base entering in July 2024 due to the phasing out of compulsory retail store discounts).

In her comments, Éva Palócz stressed that if we assume that supply shocks are indeed the cause of food price increases, this makes the use of price freezes unnecessary. The low production efficiency of Hungarian food producers plays a significant role in the spike in food inflation in the CEE region (Balatoni - Quittner, 2024.). The high price levels of the last years (1.5-2 years) are the main determinant of the inflation perceived by consumers. Kopint-Tárki expects average annual inflation to be around 5% in 2025, with month-on-month inflation of 3.9-4% at the end of December, following the January peak.

János Nagy explained that his inflation forecast for 2025 has increased with the release of the January inflation data. On the application of the price freeze, he pointed out that if supply shocks to some agricultural crop prices are temporary, then prices can correct downwards on their own as cost shocks subside. The weakening of the forint in the October-November 2024 period had a negative impact on companies' business plans and thus on their pricing decisions in January.

He stressed that inflation expectations have not been anchored well, partly due to high perceived household inflation and partly due to the increase in balance sheet indicators reflecting the price increases in the retail and services sectors ([1]). On the positive side, he pointed out that industrial producer price developments are essentially being tracked again by the consumer price index and that producer prices are already showing signs of peaking. He forecasts annual average inflation to be 5-5.5% in 2025, and in terms of the year-on-year path of inflation, he expects month-on-month inflation to fall after peaking in January.

András Balatoni explained that the structure of the January inflation surprise was a marked negative surprise in market services, but if we exclude the increase in telecoms and banking transaction fees, market services prices increased by 1% month-on-month, which is in line with the January 2024 figure.

In terms of the annual path of inflation, he expects gradual disinflation after the January peak. He stressed that the Hungarian economy has gone through a significant disinflationary period, but it is too early to celebrate the complete disappearance of the inflationary threat in the Hungarian economy, as historical examples (the inflation episode of the 1970s) support the view that an inflationary wave can be followed by another inflationary period. A highly influential IMF study examining inflation cycles over the past 50 years (see the IMF working paper One Hundred Inflation Schocks: Seven stylized facts) also identifies the premature celebration of a victory over inflation as the main reason for the return of inflation, i.e. the main lesson is the need to pursue a conservative monetary policy focused on price stability.

Achieving the inflation target is also the most effective way to support economic recovery. Recent Hungarian economic policy experience also shows that high inflation is clearly detrimental to economic growth, as inflation, and food inflation in particular, has a significant knock-on effect, namely that it can have a serious impact on public confidence. The MNB continues to disapprove of the possible use of price freezes, as 80% of the inflation surplus in Hungary compared to the regional countries was due to two factors: fuel prices and food prices, both of which were the main consumption groups affected by the price freeze measures.

He pointed out that other countries in the CEE region also experienced cost shocks, but Hungarian inflation was the highest in the region. In conclusion, he noted that the higher price sensitivity of some sectors to external cost shocks can be explained by lower competitiveness, which is reflected in higher inflation at the macroeconomic level.

Tihamér Laczkó

OTP Bank Plc. credit analyst, Secretary of the Economic Policy Department of MKT

Cover photo (for illustration purposes only): Getty Images