Hungarian inflation averaged 17.1% in 2023, but the inflation rate was declining throughout the year and continued to do so in the first half of 2024. We expect the disinflationary process to continue, although inflation is expected to pick up towards the end of the year. Overall, inflation could fall to 4.1% in 2024, followed by 3.8% in 2025 and 3.0% in 2026.
As disinflation strengthened, the Magyar Nemzeti Bank started to cut its policy rate in early 2023, reaching the level of the base rate in September. Since then, the central bank has continuously eased monetary conditions, but the degree of easing has varied in recent months, ranging between 50 and 100 basis points. We expect monetary policy to ease further in the second half of the year, but we do not expect the base rate to fall below 6% this year. The earliest date for inflation to return to the central bank’s target range of 3±1% is 2025.
In 2023, gross domestic product (GDP) fell slightly by 0.7% in Hungary, but economic growth is expected to reach 2.7% in 2024, followed by 3.9% next year. Q1 2024 was characterised by expanding consumption and sharply declining investment. Looking ahead, we expect consumption to pick up gradually in the coming quarters and investment to rebound in late 2024/early 2025, driven by falling interest rate conditions, rising business confidence and a low base. Overall, investment is expected to fall by 1.3% this year, while consumption is expected to expand by 3%.
Exports could grow by 3.2% in 2024, 7.9% in 2025 and 6.1% in 2026. Imports, supported mainly by consumption and export growth, could increase by 3.0% in 2024 and by 8.3% and 5.5% percent in the next two years, respectively. Thus, overall, net exports should make a positive contribution to economic growth this year, but next year, despite the growth in the euro area, we believe that net exports could make a negative contribution to GDP.
The labour market has also undergone a transformation in the last year and a half. In line with the previous trend, employment continued to expand in 2023, but unemployment also started to rise slightly, reversing the previous downward trend, and continued to do so in the first half of this year, reflecting the increase in the number of economically active people. To understand this unusual trend, it is helpful to analyse economic activity data for the main age groups. We can see that the majority of new entrants to the labour market came from the 55-74 age group, who were able to find employment within a short period of time, and a smaller proportion came from the youngest age group, some of whom were still jobseekers. The rise in the number of the unemployed is partly due to new entrants to the labour market who are slower to find a job, and partly due to people aged 25-54 who were previously active but are now jobseekers. Available data suggest that this trend has continued this year. We forecast that the changes observed in the last year and a half will continue this year, with employment continuing to expand and unemployment rising, the latter to 4.6%, and the market returning to its previous state by 2025, when the unemployment rate will fall back to 3.7% while employment remains high.
At the end of 2023, the ESA deficit on an accrual basis reached 6.7% of GDP and the gross public debt-to-GDP ratio fell to 73.5%. We forecast the ESA deficit of public finances to reach 4.9% of GDP in 2024 without further government adjustment measures. We expect sovereign debt to fall only marginally to 73.4% of GDP by the end of the year, reflecting the buy-back of Liszt Ferenc International Airport. In 2025, the pick-up in growth will help to achieve the planned fiscal path, so we expect the government to reach the fiscal path targeted at the beginning of the year at the latest by next year, and the corresponding 3.7% budget deficit target. Sovereign debt will fall to 72.6% of GDP by the end of the year. Based on current expectations, a budget deficit target of 2.9% in 2026 seems realistically achievable.
Table: Forecast of Századvég Konjunktúrakutató
| 2023 | 2024 | 2025 | 2026 | |
| Gross domestic product (volume index) | -0.7 | 2.7 | 3.9 | 2.9 |
| Household final consumption expenditure (volume index) | -2.2 | 3.0 | 3.7 | 2.7 |
| Gross accumulation (volume index) | -14.4 | -1.3 | 7.8 | 1.6 |
| Export volume index (based on national accounts) | -0.1 | 3.2 | 7.9 | 6.1 |
| Import volume index (based on national accounts) | -5.1 | 3.0 | 8.3 | 5.5 |
| Balance of international trade in goods (EUR billion) | 0.4 | 2.5 | 4.7 | 7.5 |
| Consumer price index (%) | 17.1 | 4.1 | 3.8 | 3.0 |
| Central bank base interest rate at the end of the period (%) | 11.4 | 6.2 | 5.4 | 5.0 |
| Unemployment rate (%) | 4.1 | 4.6 | 3.7 | 3.0 |
| Current account balance as a percentage of GDP | 1.0 | 1.7 | 2.1 | 2.6 |
| Net lending as a percentage of the GDP | 3.3 | 3.9 | 4.1 | 4.4 |
| ESA balance of public finances as a percentage of GDP | -6.3 | -4.9 | -3.7 | -2.9 |
| Government debt-to-GDP ratio | 73.5 | 73.4 | 72.6 | 70.3 |
Remark: The base rate of the central bank applies to the last quarter of the year.
