Will we step into the same river again? What awaits Hungary in 2026?
Assessment
As an analyst, assessment is part of everyday life, as countless forecasts and predictions are made throughout the year. All of these attempt to reflect changes, incoming data, and, of course, the predictions of others. However, assessing the year becomes truly difficult, or even painful, when we look back at the predictions made at the beginning of the year, or more precisely, before the year began. Well, this year is no exception.
According to Heraclitus' wisdom, no man can step into the same river twice, because it is no longer the same river, and he is no longer the same man. But what if they do? Looking at the year-end analyses, it is striking that this is now the third year in which optimism has turned to disappointment when we look at the big picture of the Hungarian economy. It seems, then, that the analyst community has now stepped into the same river three times. But will we do it a fourth time? Will we wait for the upturn and be disappointed? Or have we been disappointed too many times and are we discounting our expectations so much that we will finally get a pleasant surprise in 2026?
To answer this question, let's look at what I consider to be the two most interesting unexpected developments and the two developments that failed to materialize. We will do so in a way that represents both the negative and positive economic aspects.
The forint marches into battle
The fact that the forint strengthened at the beginning of the year did not surprise many people and was not enough to overcome the old reflex of predicting further weakening of the forint. Almost without exception, everyone envisioned an EUR/HUF exchange rate well above 400. The difference was in where people saw the ceiling. Over the past 15 years, the forint has strengthened in January or February on 10 occasions. In fact, on seven occasions, we saw strengthening in both months. All this despite the fact that between the opening at the beginning of the year and the closing at the end of the year, the forint closed weaker against the euro 11 times out of 15. Looking at the past 15 years, we have seen an average annual depreciation trend of 3%.
From this perspective, 2025 stands out, as the forint is currently expected to close the year with a gain of around 6-7%. In fact, it would not take much to break the record: in 2012, the forint appreciated by 7.5% during the year, which means that if it manages to fall below 380 by the end of the year, this record would be broken and we could talk about a truly historic run. However, in light of the recent change in the central bank's policy, this hardly seems achievable.
What did we analysts fail to see? Well, the National Bank of Hungary exceeded all expectations by sticking to its thesis that there is a new inflation regime in which the inflation target can only be achieved if the forint is stable or even strengthening. Nothing that happened at home or internationally, not even a change of leadership, could change this. Meanwhile, the central bank has accumulated enormous credibility in the market this year.
The big task now is to slowly reduce the number of hot money investors attracted by high interest rates and replace them with real money from the real economy, i.e. households and companies, in order to provide the forint with lasting stability. This is easier to explain on paper than to implement. But for now, we believe it is not impossible. Of course, with elections and expected interest rate cuts in 2026, further strengthening of the forint cannot be expected. At the same time, if the forint can be kept in the 380-395 range seen in the fourth quarter of 2025, even with fluctuations, that would be a major success. This is also what ING Bank's forecast for next year suggests. In our view, this will be the range within which the forint will fluctuate next year. The peaks, i.e., the weakest levels, will likely be seen before the expected first interest rate cut (probably in the first months of next year) and around the time of the elections.
Persistently high propensity to save
It would have been too obvious to cite GDP growth as a negative surprise. Instead, I decided to dig deeper and look at the two factors that prevented the Hungarian economy from taking off in 2025. It is always easy to explain the report card in hindsight, but there is no doubt that the more dynamic growth expected for this year – or, more precisely, the forecasts for it – would have been based on a decline in the population's propensity to save. Instead, we saw that the willingness to consume remained low, which I personally attributed to a crisis of confidence.
This was not what we expected in a year when the population earned huge interest income through retail government securities. Even though we knew that most of the savings were linked to a segment of the population with a fundamentally higher propensity to save, the investment role of retail government securities was so widespread that we expected a greater impact. Companies also expected this and compensated for the significant wage increases (this year's average wage increase of over 9% is also a massive positive surprise) with price increases at the beginning of the year. In the blink of an eye, another inflation shock hit, shaking public confidence once again.
The government's measures to curb inflation were ultimately only sufficient to "stop the bleeding." The symptomatic treatment can be considered successful, as inflation has stabilized at just over 4% on average. However, it has not succeeded in breaking the population's inflation expectations or restoring consumer confidence. Perhaps this is why everyone is more cautious about the coming year.
Of course, government programs will have the effect of increasing household income. Base effects and the margin cap and voluntary price restraint measures that will remain in place for a while will temporarily curb inflation. However, no one believes that this will lead to a lasting turnaround in consumer confidence. These constraints may ease somewhat, but everyone has become much more cautious when looking at consumption forecasts. The good news, however, is that they may be overly cautious. In other words, the GDP forecasts for 2026 are based on subdued consumption dynamics. If the population's caution eases and consumption volumes begin to catch up with the theoretical trend line that existed before the permanent crisis that has been ongoing since 2020, then we may be in for a positive surprise. Both in terms of consumption and economic growth. Currently, ING Bank expects household consumption expenditure to grow by 3.6% next year, while GDP is expected to grow by 2.3%.
Missing external demand
Another important assumption behind the more dynamic economic growth expected for 2025 was the anticipated upturn in external demand. The basic idea was that, although slowly, the global inventory cycle would turn around this year, so that developed markets would also shake off their caution and demand for durable consumer goods would start to grow more dynamically. However, the failure of this to materialize has put countries with a large industrial weight and exposure to external demand in a difficult position, whether they are developed countries such as Germany or France or developing countries such as Hungary.
In the case of new investments still in progress, expectations were high regarding the start of production and its export potential. At the beginning of this year, I was already skeptical that these investments would boost GDP by 1.0–1.5 percentage points this year. However, I did not expect it to be essentially close to zero. I suspected that net exports would not really help the economy this year, but even I did not anticipate such a negative figure as is now emerging for this year. Ongoing investments and the demand for imports driven by consumption, which is not booming but is still pulling the economy, exceeded expectations, while exports continued their downward trend. In such headwinds, it is hardly surprising that the Hungarian economy has remained close to stagnation. Neither internal nor external drivers are capable of boosting growth. A modern aircraft can fly with one engine, but it can hardly take off. Especially if neither engine has enough fuel to rev up.
Expectations for next year are even more subdued. No one is anticipating a major industrial turnaround. And although there was hope for a while that the EU, and especially the German budget turnaround, could boost external demand as early as 2026, no one is really counting on that anymore. I think that the effects of this – if the turnaround is actually successful – are more likely to be felt in 2027. Until then, the hope remains that the vehicles that are manufactured domestically or for which parts are manufactured domestically will start to sell. These are uncertain expectations. At the same time, it also carries the possibility of positive surprises. A faster ramp-up of production capacity and a revival in demand for industrial goods with a favorable emphasis for us could still bring a pleasant surprise. For the time being, however, we expect net exports to continue to significantly dampen economic performance in 2026.
Labour market collapse not yet underway
Of course, one could complain about the weak growth. But it could have been worse. When it became clear that this year would not be a good one either, the possibility of rapid consolidation in the labour market loomed large. A significant number of companies have been holding back on hiring for years, and the proportion of these companies has grown steadily during the three years of stagnation. We had good reason to believe that companies would not be able to sustain this any longer this year. Well, they did sustain it. Of course, this came at a price: rising wage shares, rising prices, and shrinking profit margins.
Behind the gradually deteriorating growth forecasts, there were increasing references to the fact that the tightness of the domestic labour market was easing. Well, this did not age well either. It is true that the number of people in employment has fallen by around 55,000 compared to the peak of recent years. At the same time, it is also true that it is still close to the levels seen in the summer of 2022. So there has been no tragedy at the macroeconomic level. There has been no big jump in the number of unemployed, and the unemployment rate has remained stuck at around 4.5%. But then what kept the labour market tight?
Well, the supply side has been steadily declining since mid-2022. The population aged 15–74 has decreased by 130,000 to date. This is equivalent to the total population of Győr, Hungary's sixth largest city. The drastic deterioration in the demographic situation has therefore already begun to constrain the supply side of the labour market, which has masked the decline in demand. This has kept the main labour market rates stable and the market tight in general. In this situation, and after three years of stagnation and a prolonged decline in investment, minimum wages will have to be raised by 7-11% next year. The tight labour market does not allow companies to ignore the issue of wage compression within the company. In light of this, average wage growth may still be around 10% next year, even if we take into account the roughly 1 percentage point impact of next year's weapon pay.
That is my prediction, but market figures generally calculate with some kind of middle-of-the-road solution. Strong wage increases, minimal extensive adjustments (i.e., in terms of headcount) through layoffs, moderate price increases, and a further slight erosion of profit margins. But that sounds too idealistic. If, at the beginning of next year, companies see that demand is not picking up and this year's revenue targets are once again at risk, they will start laying off staff instead of waiting it out. This could trigger another negative spiral in the economy, which could even lead to recession.
Of course, there is another possibility, namely that the economy will start to grow at the beginning of 2026 as a result of government stimulus measures. In that case, however, we will have to reckon with inflationary risks, and it is quite possible that we will see a higher figure than the 3.4% inflation we are expecting for next year. This would push up the price level increase for 2027 even further. This would take us even further away from achieving the desired price stability, as we are already calculating inflation of 4.3% for 2027. ING's forecast is much higher than the latest MNB projection. Perhaps the most important difference is the assumption of corporate repricing behavior following the elimination of price caps. I personally believe that there may even be an overshoot, while the central bank—based on its estimates—calculates that the pace and extent of price adjustments may be even smaller than previously expected.
High hopes
So there are plenty of reasons for both optimism and pessimism regarding the coming year. There is no doubt, however, that after so many difficult years and forecasts marked by so-called “treasury optimism,” analysts are becoming increasingly cautious, but gloom still does not prevail. So yes, it may well be possible to step into the same river for the fourth time. At the same time, I believe that people hope not because they are sure of success, but because they want to believe.
Cover photo (for illustration purposes only): Getty Images
