Vienna-based institute publishes gloomy forecast on the outlook for the Hungarian economy

According to a recent analysis by the Vienna Institute for International Economic Studies (wiiw), the Hungarian economy faces serious challenges as it struggles to find its place in a complex global and domestic environment. The Institute's report shows that Hungarian economic growth in 2024 fell far short of expectations, with GDP expanding by just 0.5% compared to the 4% previously forecast.

Therefore, the downward revision of their GDP growth expectations for this year from 2% at the beginning of the year to 1.8% does not reflect the fact that the first quarter GDP growth rate shrank by 0.2% again, but the deterioration in the economic environment. In this light, it is particularly alarming that wiiw sees a lot of downside risks to the Hungarian economy.

Their analysis was published before the first quarter 2025 data, which fell shy of all analysts' expectations, so they gave their forecast for this year without it.

Azonban így is pesszimista módon, az év eleji 2 százalékról 1,8-ra rontották az idei GDP-bővülési várakozásaikat.

However, they have still pessimistically lowered their GDP growth expectations for this year to 1.8% from 2% at the beginning of the year. The weak performance was driven by a number of factors, including a sharp fall in investment, weak industrial output and a contraction in key sectors such as agriculture and construction. Although household consumption remained relatively strong, the economic outlook remains clouded by concerns about persistent inflation and the public deficit, as well as political uncertainties surrounding the 2026 parliamentary elections.

Hungary not out of the ditch at all

The disappointing growth in 2024 was marked by a significant decline in sectors, according to wiiw. Agriculture, industry and construction all declined, while industrial output shrank for the second year in a row.

The only sector to show growth was services, particularly accommodation, food services, information and communication and entertainment.

However, this growth has not been able to compensate for the weaknesses in the economy. Gross fixed capital formation, a key driver of long-term growth, showed a sharp decline of 7.4% in the corporate sector, while the public sector contracted by 28.9%,

mainly due to the suspension of EU transfers and the government's fiscal consolidation efforts, which resulted in the postponement of a number of public investment projects.

Chronic "underinvestment" is a long-standing problem in Hungary, with investment volumes in 2024 more than 17% below 2017 levels, according to wiiw's assessment.

Inflation has not disappeared from the scene

Inflation is again a major concern for the Hungarian economy, as highlighted by wiiw. After a period of disinflation in 2024, consumer prices started to rise sharply by the end of the year, reaching 5.7% by February 2025. Core inflation stood at 6.2%, with food price inflation rising to 7.1% and services to 9.2%.

Several factors are behind the inflationary pressures, analysts say: rising farm producer prices, rising electricity and fuel costs, rising wage claims and a weak forint, which has made imported goods even more expensive. The government's response to soaring food prices has been to cap retail margins at 10% for 30 essential food items - a measure that could be extended if prices continue to rise.

However, wiiw warns that a state-intervention approach to market processes can have unintended consequences: it can distort market conditions and lead to shortages or deterioration in product quality.

Tariff war just another dark shadow

The start of 2025 was also characterised by weak economic performance, with construction output falling by 9.6% in January and industrial production continuing to fall, wiiw reported. The Economic Research Institute (GKI) business confidence index, an important indicator of economic sentiment, fell to a 50-month low in January 2025. The outlook was further worsened by a 14.6% annual decline in manufacturing orders, including a 17.9% drop in the automotive segment. While there is some hope for an improvement in the second half of the year, brought about by the completion of investment in the automotive sector, the overall outlook remains uncertain.

According to wiiw, the likely US-European tariff war could have a significant negative impact on Hungary's automotive industry, as it is closely integrated into German supply chains.

The political situation is also adding to the economic uncertainty, wiiw points out. With the April 2026 parliamentary elections approaching, both the ruling Fidesz and the opposition Tisza Party have entered campaign mode. Wiiw's experts say the government is spending ahead of the elections, but the current economic situation - accelerating inflation, a significant budget deficit and international uncertainties - is likely to limit the cabinet's room for manoeuvre. They point out that there are already budget-busting measures - voted by parliament on Tuesday - a lifetime personal income tax exemption for mothers, a VAT rebate on basic foodstuffs for pensioners, and one-off allowances for police officers and soldiers.

As mentioned above, wiiw forecasts moderate GDP growth of 1.8% in 2025, driven mainly by a 3.5% expansion in household consumption. This consumption growth will be fuelled by rising real wages and pre-election transfers. Investment, in particular gross fixed capital formation, should contribute only modestly to growth, especially in the second half of the year.

Community consumption and net exports, on the other hand, will have a negative impact on growth, reflecting persistent fiscal problems and weak external demand.

On the production side, industrial output could start to improve towards the end of the year, with the automotive sector ramping up capacity. However, the services sector will continue to be the main driver of growth, wiiw stresses.

The general government deficit remains a serious problem for Hungary, says wiiw. In the first three months of 2025, nearly 62% of the annual deficit has already accumulated. This, combined with pre-election spending, almost rules out the possibility that the government will be able to meet its original deficit target of 3.7% of GDP. According to the institute's forecast, the budget deficit will reach 5% in 2025 and further austerity measures may be needed in the coming years.

As previously projected by the European Commission, wiiw expects public debt levels to remain persistently high, at around 74% of GDP until 2027.

In its report, the research institute highlights that the outlook for 2026 and 2027 is marked by considerable uncertainty, due to both internal and external factors, wiiw points out. The pre-election spending in the first half of 2026 is expected to provide a temporary boost to growth, but this will be followed by fiscal tightening as the government seeks to bring the growing deficit back under control.

They expect GDP growth to accelerate to 2.5% in 2026 and then slow to 2.0% in 2027 as a result of austerity.

They see the political outcome of the 2026 elections as a key factor in shaping Hungary's economic policy - a possible government crisis could bring a significant change of direction.

Cover photo (for illustration purposes only): Getty Images