EBRD publishes surprising forecast for Hungary

The London-based financial institution, founded in 1991 to finance the transformation of Central and Eastern European economies, unveiled its first comprehensive regional forecast this year on Thursday, projecting average growth of 3.2% for 2025 as a whole and 3.4% for 2026 in the bank's area of operations. This is the first time the EBRD has given a forecast for 2026, while

this year's forecast is 0.3 percentage points lower than its previous estimate released in September.

According to the EBRD, the main reason for the change is weak external demand, which, in the bank's view, is having a pull-back effect on growth in the EU economies of Central and Eastern Europe and the Baltic States. The new EBRD forecast projects average economic growth of 2.7% in 2025 and 2.8% in 2026 for the nine central European and Baltic EU economies - Hungary, the Czech Republic, Slovakia, Poland, Slovenia, Croatia, Latvia, Lithuania and Estonia. This year's forecast is 0.5 percentage points lower than the previous EBRD forecast for the region.

The EBRD expects Hungary's gross domestic product (GDP) to grow by 2% this year and 2.8% next year.

This year's growth of 2% is broadly in line with market expectations: most of the experts in the paper do not share the government's optimism, and predict a much lower growth rate than the 3.4% forecast for this year. At the same time, next year's forecast of 2.8% is surprisingly low: the consensus in Portfolio's latest analyst survey was 3.6%, and no one expected GDP growth of less than 3%.

The EBRD cut its forecast for Hungarian economic growth in 2025 by 1.3 percentage points, mainly due to the prolonged recession in the German economy, Hungary's main export market, which the EBRD said has had a drastic impact on Hungarian exports. However, the bank cited the start of production this year at the Szeged plant of Chinese electric car maker BYD, as well as at the BMW car plant in Debrecen and the CATL battery factory, as a positive factor. The EBRD said that production at these plants could boost the growth rate of the Hungarian economy by 0.6-0.8 percentage points this year and next.

US tariff hike plans are creating serious uncertainty worldwide, according to Thursday's report. However, the EBRD stresses the relatively limited exposure of its operations to US trade policy. The bank said it estimates that the total domestic product of the economies in its area of activity would fall by 0.1-0.2% if the US were to impose a uniform 10% tariff on the group of countries. However, the organisation notes that Hungary has the largest trade exposure (along with Slovakia and Lithuania), with a projected 0.4% drop in the case of a unified tariff.

The EBRD highlights that R&D activity in the region is weakening (in line with European trends). In 2023, there will be only three regional development champions among the top performers, one of which is Richter.

Assessment of the situation in Hungary

Preliminary real GDP growth estimates for Hungary in 2024 indicate a marked economic slowdown, to 0.5%. The prolonged recession in Germany, Hungary's main trading partner, has drastically reduced Hungarian exports, particularly in the automotive sector, weakening industrial production. Investment contracted by around 10% per annum over the past two years, in part reflecting high interest rates (at 6.5%, the highest in the CEB region) and the continued freezing of EU funds as progress with reforms requested by the European Commission has been deemed insufficient. On a positive note, the Chinese electric car factory BYD in Szeged and BMW car and CATL battery factories in Debrecen are set to commence operations in 2025. Production at these factories could boost annual GDP growth by 0.6-0.8 percentage points this year and next, according to central bank estimates. As economic conditions improve in Germany and Hungary’s other trading partners, exports should strengthen too. Government measures targeting growth include the recently expanded rural home renovation programme, the workers’ loan scheme, which increases disposable income for households expanding their families, and the provision allowing pension savings to be used for housing purposes. The parliamentary elections scheduled for the spring of 2026 are likely to delay consolidation of public finances, despite the excessive deficit procedure in place. GDP growth of 2% is expected in 2025, accelerating to 2.8% in 2026.

For Ukraine, the EBRD forecast a public deficit of 19.4% of GDP this year. The bank stresses, however, that the deficit will be fully covered by the $38.4 billion external budget support package put together for this purpose. The bank expects the Ukrainian economy to grow by 3.5% this year and 5% next year if a ceasefire agreement is reached by the end of this year. Ukraine's gross domestic product fell by 28.8% in 2022, the first year of the war, the EBRD estimates, but grew by 5.3% in 2023 and 3% last year. The EBRD has disbursed more than €6.2 billion in financing for programmes in Ukraine since the start of the war. In December 2023, the Bank's Board of Governors approved a capital increase of €4 billion requested by the Board of Directors to continue support programmes in Ukraine, bringing the EBRD's paid-up capital to €34 billion.

Cover photo (for illustration purposes only): Getty Images