Economy 23 May 2025, 9:06am

Leading economists warn about limited fiscal and monetary policy options in Hungary

Portfolio

The room for manoeuvre of fiscal and monetary policy has also narrowed today: the budget deficit's disappearance may be reflected in the reactions of market investors, who are now particularly sensitive, and the possible relaxation of the forint may be reflected in runaway inflation - this was revealed at the Portfolio Lending 2025 conference by György Surányi, Viktor Zsiday and András Balatoni in a closing discussion moderated by István Madár, in which the economists outlined the mistakes and desirable direction of economic policy.

Makrogazdasági beszélgetés, Hitelezés 2025 konferencia

Why has the Hungarian economy been near recession for three years now?

According to András Balatoni, Director of the National Bank of Hungary (MNB), GDP is heterogeneous: there are some areas in which we are doing well in the region, such as household consumption growth, while in exports we are keeping pace with the region. In terms of investment, however, we are hanging out of the queue, the near-recession can be attributed to the latter, and the really interesting thing is why business investment is so weak. One of the answers, he says, is the subdued European economy, which is not conducive to capacity expansion, and another is uncertainty, fuelled by the tariff war.

According to university professor and former MNB Governor György Surányi, the Hungarian economy experienced high growth only between 2017 and 2019, and this was not sustainable either, as it was on an overheated, non-equilibrium path. The government forecast that GDP should have grown by 19% cumulatively between 2023 and 2025, but instead it will be 1.5-2%. Labour reserves are running out, and the Hungarian economy's organic growth potential is at most 2% per year. We are in a growth crisis, the Hungarian economy cannot grow rapidly on an equilibrium path with the structure that has been in place for the last 20-25 years. He is sceptical about the government's intention to boost growth in the short term through consumption, as the increase in imports and hence the decline in net exports will pull growth back. Meanwhile, key areas from social policy to R&D are seriously underfunded.

Investment expert Viktor Zsiday pointed out that over the past 15 years, productivity growth in the Hungarian economy has increased by only 1% per year, and there have been many interventions that have set this back. Perhaps the good question is not why the economy is not growing, but how it has managed to grow so much over the last decade and a half.

How should economic policy change?

According to Viktor Zsiday, the last 20 years have been successful in the region in terms of convergence towards the EU average, and the structure of the workforce has played a major role in this, as companies have been able to locate a number of service centres here. However, with the current direction of Hungarian economic policy, these engines could disappear, so politically we should integrate back into Europe and let the economy work.

György Surányi said that the EU's real added value for the economy is not free benefits, but the European values, and despite this, there is a shortage of EU funds, so Hungary will receive half as much as it could in 2024-2025, which amounts to 1.5% of GDP. Our external balance is in surplus, so it could still absorb the inflow, but to increase market competition we would have to reduce spending on economic development and increase spending on R&D, and make severe budgetary reallocations.

András Balatoni said that according to the central bank's 2023 research, the most competitive firms are those that innovate and grow fast. It revealed that 1,100 such firms accounted for 0.3% of all companies and 23% of Hungarian economic growth in the 2010s. Hungarian companies raise very little external finance, and the population is still characterised by credit deprivation. Growth will not come from fiscal stimulus, but from products and services that can be sold on the market.

Price (margin) caps, wage dynamics, budget

According to András Balatoni, if retail trade is pushed into a permanent loss by price (gap) freezes, market adjustment can offset or even fully compensate for the downward pressure on inflation, and the problem is that the negative side effects can become permanent. In more oligopolistic markets, however, there is room for tighter competition policy, there are market anomalies that are worth addressing.

György Surányi said that the income and inflation management policies of recent years remind him of the 1960s and 1970s, when the word inflation could not be uttered, but inflation existed. But then inflation was treated much more sophistically than it is now. Inflation cannot be contained by price freezes, while fiscal and monetary policy is too loose and economic policy is based on the devaluation of the forint, he said. Taxes are not low, 45% of the budget is income-centralised, special taxes bring in more to the budget than corporate tax, and these also have a big impact on inflation.

The government has made a big improvement in the primary budget balance since 2020, but the tense political situation could lead to a lot of spending in the coming quarters, says Zsiday. After the first round of the presidential elections in Romania, it became clear that there is concern among investors about this in our region, and the rise in US bond yields shows that investors have become more sensitive. If they are in a punishing mood and are hit by fiscal easing, we could be in for a market slap.

How can the new central bank leadership be judged as successful in two or three years' time?

According to Zsiday, the most important task would be to stabilise the forint exchange rate, as the belief that the forint is constantly weakening must be eradicated from the public. From then on, however, the MNB will have little freedom in terms of interest rates and will not be able to support the government's economic stimulus plans, because the market will force interest rate hikes if necessary.

According to György Surányi, the MNB should not continue to play on the gradual depreciation of the forint either, this approach has already changed since 2021, and the new MNB leadership seems to think it is important that the forint exchange rate is stable, and György Surányi believes that the real exchange rate should also be kept under close watch. The HUF 2,500 billion of losses that the central bank incurred in its "core activities" were financed by the MNB through money creation, "printing money", which was used as profits by the initial promoters of central bank programmes, but also played a role in bringing inflation above 20%. Whether the central bank's capital is in negative territory is irrelevant, he says, and inflationary effects should be reduced.

András Balatoni said that he could argue with the findings on many points, but that the exchange rate's potential to improve competitiveness is actually smaller today than before.