Commission publishes rare gloomy forecast for Hungary

According to the European Commission's latest Spring 2025 Economic Forecast, the EU economy is expected to grow by 1.1% in 2025. This is a much more modest growth rate than expected in its previous forecast last autumn. For the eurozone, the GDP growth forecast has been lowered from 1.3% to 0.9%.

The worsened outlook is largely due to the impact of increased tariffs and the heightened uncertainty caused by the recent abrupt changes in US trade policy and the unpredictability of the tariffs’ final configuration. As a result of these factors, the previously hoped-for economic recovery appears to be lagging and growth could be similar to last year's 1%. GDP forecasts for this year have been revised downwards most sharply in Germany, Austria and Hungary.

Despite these challenges, EU growth is expected to rise to 1.5% in 2026, supported by continued consumption growth and a rebound of investment. Growth in the euro area is projected to reach 1.4% in 2026.

Disinflation is anticipated to proceed more swiftly than expected in autumn, with new disinflationary factors from ongoing trade tensions outweighing higher food prices and stronger short-term demand pressures. After averaging 2.4% in 2024,

headline inflation in the euro area is expected to meet the ECB target by mid-2025

— earlier than previously anticipated — and to average 1.7% in 2026. Starting from a higher level in 2024, inflation in the EU is projected to continue easing to 1.9% in 2026.

Although the rise in food and services prices is temporarily reducing the rate of disinflation, several factors point to a decline in inflation.

1. Significantly lower energy commodity prices and downward-sloping forward curves are driving consumer energy inflation into negative territory this and next year.
2. As the trade relationship between the US and China unwinds, competitive pressures on non-energy industrial goods in the EU are intensifying, leading to a decrease in this component's inflation.
3. The appreciation of the euro and other EU currencies amplifies disinflationary pressures on imported commodities and goods.

According to the report, on aggregate in the EU, this year, real wages should fully recover the purchasing power losses accrued since mid-2021, though in a few Member States the recovery in real wages is still lagging behind. 

The job intensity of growth has begun to decline from high levels and is expected to normalise further over the forecast horizon, with employment expanding by about 1% cumulatively over 2025 and 2026—slightly less than the autumn projection, but still adding two million jobs. As the labour force expands more modestly, the EU unemployment rate is projected to decline to a new historic low of 5.7% in 2026.

This forecast assumes that the high tariffs announced on 2 April will not be reinstated and that US tariffs on imports from the EU and nearly all other countries will stay at 10% (the level generally applied on 9 April), except for higher tariffs on steel, aluminium, and cars (25%), and exemptions on some products like pharmaceuticals and microprocessors.

An escalation of trade tensions between the EU and the US could depress GDP and rekindle inflationary pressures. Intensified trade tensions between the US and other major trading partners could also have ripple effects on the EU economy.

Forecasts for Hungary

According to the European Commission's economic forecast published on Monday:

• the Hungarian economy is expected to grow by 0.8% in 2025, well below the 1.8% forecast last autumn;
• even in 2026, growth will only pick up to 2.5%, compared to the 3%+ pace previously expected;
• Hungary's budget deficit will be 4.6% of GDP this year, which could rise again next year as a result of measures recently announced by the government.

Hungary's GDP is expected to grow by just 0.8% in 2025, well below the government's forecast of 2.5% and the central bank's (MNB) 1.9-2.9% estimates, according to the Spring Forecast. Analysts had previously warned that economic growth could be much more subdued, but the government has yet to revise its estimate and the central bank last revised it at the end of March.

The EU executive expects private consumption to remain the key growth driver, supported by real income growth, as well as higher personal income tax exemptions and allowances.

Investment, particularly by corporations, is expected to be limited in 2025 but is

set to rebound in 2026 as the headwinds from global trade uncertainties ease and government-supported construction picks up.

Exports are projected to recover, driven by improving demand and new production capacity in FDI-funded facilities. Higher domestic demand is also set to boost imports and reduce the current account balance while income outflows to the rest of the world are assumed to remain low. 

Risks to the outlook include subdued external demand, which is particularly important given Hungary’s trade exposure and deep integration into global supply chain in key sectors, as well as inflationary pressures, which have been exacerbated by high wage increases and other government-funded policy measures,

the EC said.

The table shows that, in addition to economic growth, the Commission has raised its inflation forecast and slightly raised its unemployment forecast. Unpleasant inflation data at the start of the year may explain the rise, but the government is trying to keep prices under control by freezing margins. The Commission points out that while these measures may temporarily reduce the pace of price increases, they could lead to a spike in inflation in 2025-26 when they expire.

Domestic demand and rising food prices are expected to keep inflation elevated in 2025.

Although price regulations and negotiations between the government and major service providers are set to moderate inflation temporarily, prices are likely to adjust once those measures end in 2025 and 2026.

Inflation is forecast to increase to 4.1% in 2025, before decreasing to 3.3% in 2026, driven by lower commodity and energy prices along with somewhat easing wage pressures. 

According to the Commission,

there are serious problems with the budget.

In 2025, the deficit is projected to narrow further to 4.6% of GDP, while the government's upwardly revised target is 4.1%, not to mention that a 3.7% gap is pencilled in for next year in the 2026 budget bill submitted to Parliament, with the EC projecting 4.7%.

"Primary expenditure growth is set to remain high as a result of public wage increases and growing operating expenditure. Interest expenditure is forecast to decrease due to lower coupons on inflation-linked bonds, while energy subsidies are set to decline further. Public investment is expected to stabilise after a large drop in 2024," the EC said.

The worse-than-expected fiscal path also means that the Commission expects Hungary's debt-to-GDP ratio to rise in 2025, with only a minimal decline from there next year.

The debt-to-GDP ratio increased in 2024, in part due to a weakening of the forint and the acquisition of the Budapest airport. It is projected to increase further to 74.5% of GDP in 2025 as large cash interest payments accrued in previous year are due. It is projected to decline slightly in 2026. 

"In 2026, the deficit is projected to increase slightly to 4.7% of GDP, driven by recent new policy measures," the EC said.

"Income taxes are set to decrease significantly due to the planned introduction of a personal income tax exemption for mothers and an increase in the family tax allowance, totalling an estimated 0.6% of GDP. These will be partially offset by the extension of sectoral taxes which were due to expire in 2025. Public wage growth is set to remain high on account of bonuses for military and law enforcement staff, estimated at 0.5% of GDP. 

The fiscal outlook is surrounded by downside risks stemming from growth and domestic policy uncertainties,

the EC said.

Cover photo: EU