Bad news on the Hungarian economy trigger forlorn forecasts

The Hungarian economy contracted by 0.2% in the first quarter compared to the previous one. Tuesday's GDP "growth" figure was in line with the preliminary data, which caused a huge downside surprise a month ago.

The monthly macro reports also suggested this:

• Industrial production is suffering due to weak export demand.
• Investment is in free fall because of a lack of public and EU resources for development, as well as low private sector confidence.
• Meanwhile, private consumption growth is failing to translate into growth.

Following the release of weak GDP data, analysts now believe that Hungarian economic growth could remain very low throughout the year.

Non-farm GDP shrank by 0.1% YoY in Q1 (and by 0.2% QoQ), while non-farm private sector GDP declined by 0.3% YoY and 0.4% QoQ.

These figures suggest that underlying economic activity is even weaker than the headline data implies, as growth is being propped up by the agricultural and public sectors,

analysts at OTP Bank said in a research note on Wednesday.

Industry and construction have declined on both YoY (by 3.9% and 5.1%, respectively) and QoQ basis (according to our in-house adjustment: 3% and 1.2%, respectively). Value added in the market service sector increased by 1.1% YoY (the lowest figure since Q3 2023) and stagnated on QoQ basis (the lowest figure since Q1 2023).

Overall, we can say that the Hungarian economy is facing similar challenges to those experienced by other industry-focused European economies.

These challenges include a shift in demand toward services, while the automotive sector – the former driver of growth - struggles with high energy prices, technological transitions, and increasing competition from China.

In addition, country-specific factors also contribute to Hungary’s weak economic performance. Investment levels have been falling sharply for the third consecutive year, as the previous, investment-heavy economic strategy led to overcapacities in certain sectors. Meanwhile, public investments have been scaled back following the suspension of EU funds. Hungary’s manufacturing sector is heavily reliant on car and battery production — industries that are currently underperforming across many economies.

On the expenditure side, the key driver of economic growth in 2024 (0.5% YoY) was household consumption, which had been expanding at a pace of 4–5% in the past quarters. In Q1, consumption remained the main growth engine, with a year-on-year increase of 4.1%. However, quarter-on-quarter growth slowed to 0.5% from 1.2% (based on OTP's in-house seasonal adjustment), marking the weakest performance since Q2 2023.

Moreover, the quarterly growth rates show a clear downward trend.

This is particularly disappointing, as we had expected household consumption to remain the primary driver of growth in 2025, with an anticipated growth rate of around 5%.

Several factors now suggest that the slowdown in consumption growth may not be temporary.

Real wage growth has decelerated from 10% in 2024 to around 4%, employment figures have slightly deteriorated, consumer confidence has failed to recover, and despite the slowdown in consumption, household financial asset accumulation remained weak. This latter may indicate that actual income developments are less favourable than wage data alone suggest. While several fiscal measures — such as the personal income tax exemption for mothers with three or more children — are set to take effect in the second half of this year, they are unlikely to reverse the current trends. As a result, OTP's analysts have revised their household consumption growth forecast for 2025 down to 3.5%.

The main reason behind the weak growth in Q1 is that investment has continued to fall sharply (10.2% YoY and 2.4% QoQ). This indicates that the eleven-quarter-long contraction in investment has yet to reach its bottom. The downturn is driven by several factors: weak GDP growth across Europe, structural challenges in the automotive and battery industries, overcapacities resulting from pre-2022 investment-focused stimulus packages, and the ongoing freeze of EU funds. In addition, retail trade – another important branch from an investment point of view – also faces challenges.

Sales volumes remain well below their mid-2022 peaks, and the sector is burdened by a growing number of extra taxes and government interventions, such as price caps.

Unfortunately, currently none of the main forward-looking indicators point to rapid turnaround in investment; building permits are decreasing, and corporate borrowing remained weak. Hungary's demand cycle indicator is also falling, while the uncertainty caused by the tariff war will kick in in Q2. OTP's analysts have reduced their investment forecast to -5% for 2025 as a whole, taking into account the following factors:

• the carry-over effect in 2025 is -3.5%,
• investment declined further in Q1 on QoQ basis, and
• because of the abovementioned factors, there is low probability of a sharp improvement in the remaining part of the year.

In Q1, the growth contribution of net exports was -0.3 ppts as exports contracted by 0.4% and imports increased by 0.1% YoY. OTP's analysts have pointed out that exports’ decline was far from common in CEE peer countries (exports surged +3.6% in Czechia, +1.1% in Poland, and +0.1% in Slovenia.)

This can be the consequence of Hungary’s export structure, which is more heavily focused on batteries and cars.

The recent weak performance of battery production is particularly noteworthy in light of the robust growth in electric vehicle (EV) sales across Europe, which have jumped by 27.9% by the end of April. This divergence raises concerns regarding the absorption capacity for both existing and planned battery production capacities in Hungary.

Hungary’s total (both direct and indirect) export exposure to the USA is significant: our estimates indicate that approximately 10% of total Hungarian exports are linked to United States’ final demand.

Consequently, the ongoing trade war could have a substantial impact on Hungary’s exports in the remainder of the year — particularly due to the elevated 25% tariff currently imposed on automobiles and automotive parts.

As a result, OTP has lowered its 2025 export and import forecasts to -1.1% and -0.6% (from 0.5% and 2%, respectively). As import growth forecast was lowered to a greater extent – because of the lower import demand of weaker consumption and investment growth – than that of export, the growth contribution of net export improved slightly. Exports are expected to improve in 2026, thanks to new export capacities coming on stream (BYD, BMW), the German fiscal stimulus, and the hope that the new tariff regime will crystallize by 2026, and the respective uncertainties will be fading.

After the release of preliminary GDP data, OTP's analysts lowered their 2025 GDP forecast from 2% to 1%, but in light of the unfavourable structure of the Q1 GDP data, they reduced their GDP forecast further, to 0.6%.

We have also officially revised our forecast for Hungarian GDP growth in the coming years,

economists at ING Bank in Budapest wrote in a research note. "The Central Statistical Office's detailed GDP report for the first quarter confirmed our concerns, following the preliminary data. Although we had previously expected growth of 1.2% by 2025, in light of the detailed data we have revised this down further to just 1.0%," they added..

so, the Hungarian economy is still unable to return to growth, with quarterly GDP volumes essentially unchanged since mid-2022.

"We have lowered our growth forecast for 2026–27 from 4.0–4.5% to around 3%. This reflects intensifying global challenges, further delays to new export capacity, and weakening confidence.

Low business and consumer confidence continues to be a significant obstacle for the Hungarian economy,

they pointed out. An unpredictable external environment is holding back investment activity, while a slowly deteriorating labour market and high inflation are prompting people to save rather than spend. According to the analysts, government interventions have so far proved ineffective in boosting business and consumer confidence, and they may even be counterproductive as they create further uncertainty.

Slowing real wage growth does not suggest a rapid recovery, and external demand is not expected to increase in the near future.

Moreover, the investment programme in Germany and the increase in EU defence spending will not have a significant positive impact until 2026–27 at the earliest.

ING highlights:

Against this background, we expect GDP growth of just 1% in 2025, subject to downside risks.

This growth will be driven by rising final consumption, albeit at a slower pace than anticipated. Meanwhile, we expect investment activity to decline more sharply. They added that the impact of net exports on GDP growth will be less negative than expected due to weaker domestic demand.

Hungary continues to face a double challenge that is without precedent in the last 30 years.

The country has already experienced challenging periods due to labour market issues and inflation, which have impacted domestic demand. However, external demand has played a key role in stimulating growth in recent years. Although some crises have led to a contraction in external demand, policymakers have had ample scope to stimulate domestic demand. Over the past three years, however, we have seen both internal and external shocks exerting pressure on the Hungarian economy, the ING economists pointed out.

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