Despite a continuously weakening global economic environment, domestic consumption growth continues to support Hungarian GDP expansion

Inflation

Externally, European disinflation continued in the recent period, and without further external shocks, euro area inflation could fall to 2% in the medium term. The positive external environment suggests that external inflationary pressures in Hungary will remain subdued in the coming period. The European Central Bank lowered its refinancing rate to 2.15% in June and is expected to reduce it further during the year.

Currently, the strongest drivers behind inflation in Hungary are the high rates of food and service price inflation. These two main groups account for more than 55% of the total consumer basket, making it particularly important to moderate inflation in both areas. High food price inflation is driven by rising global prices for certain products (such as coffee, cocoa beans and eggs), while drought in Hungary has also had a significant impact on other products. In the services sector, particularly the significant increases in monthly fees caused problems in the first half of 2025. The government’s price margin regulations and its agreements with telecommunications providers and banks may push the inflation rate below the market expectations at the beginning of the year.

In the light of global and domestic trends, inflation could reach 4.4% in Q2 2025, fluctuating between 4% and 5% throughout the year according to our calculations. In 2025, inflation in Hungary may be 4.6%, falling back within the central bank’s target range (3.8%) in 2026. Inflation trends are limiting the central bank’s room for manoeuvre this year. We expect a maximum reduction of 25 basis points from the current base rate of 6.5% in the last quarter of the year, provided the geopolitical and economic environment remains favourable.

GDP

Seasonally and calendar-adjusted and balanced data show that Q1 2025 GDP was 0.4% lower on an annual basis and 0.2% lower on a quarterly basis, falling short of market expectations. In addition to the more subdued Q1 data, our forecast for lower growth also reflects increasing geopolitical and global economic risks. Our previous forecast did not take into account the economic impact of the trade war or the consequences of the Israeli-Iranian war, so we have incorporated these effects into our current forecast. Accordingly, we expect the Hungarian economy to grow by 1.0% in 2025 and 2.6% in 2026. We expect growth to accelerate steadily in 2025, enabling the Hungarian economy to expand by 2.3% year on year in Q4.

In 2025, Hungarian economic growth will be powered mainly by rising consumption. Our calculations suggest that consumption could grow by 3.7% this year and next. Current dynamics reveal that, in terms of production, consumer growth is most evident in the growth of services. Besides real wage growth, consumption growth is also supported by the government’s economic action plan, interest payments on government securities, the broadening of the scope of personal income tax exemptions, and the doubling of family tax allowances in two steps.

Given the subdued Q1 investment data (-12.3%), we have revised downwards our forecast for investment. Overall, the 3.5% decline in 2025 could be followed by a 5.0% increase in 2026. In addition to the postponement of public investment projects in recent years, low investment activity among companies is also contributing to weaker investment performance. The cautious investment appetite among companies may be attributable to the previous high interest rate environment, the changing geopolitical environment and uncertainties surrounding external demand. Large-scale industrial investments (BMW, BYD, CATL) are expected to have a one-off positive impact on investment performance in the second half of the year.

The country’s exports could grow by 1.9% in 2025 and 4.5% in 2026. Looking at the dynamics during the year, we expect exports to pick up rather in the second half of the year. The economic performance of Hungary’s target markets is decisive for its exports: since the last forecast, the European Commission has revised downwards its estimates for European countries, including Germany, which is Hungary’s main export market, negatively affecting Hungary’s export expectations. In addition, the new tariff policy of the US raises further questions regarding the restructuring of supply chains.

In the trade war, the US increased tariffs on major commodities such as motor vehicles and related parts, as well as steel and aluminium imports. The highest tariffs were imposed on China, Canada and Mexico, but the level of integration of supply chains means that indirect effects will also be significant. Figure 2 illustrates the distribution of imports and exports of goods by destination in 2024. The data show that 4.1% of Hungarian goods exports go directly to the US, while the largest share, almost 76%, goes to countries in the European Union. Therefore, besides the direct effects, indirect effects are also likely to be significant in Hungary, mainly because the machinery and vehicles targeted by the tariffs account for 39% of exports from Europe to the US and more than a quarter of Hungary’s manufacturing industry.

Hungary’s imports may rise by 2.9% this year and 4.8% next year, mainly supported by consumption growth. We expect import growth to exceed the export growth rate until Q2 2026, so net exports may be negative this year and early next year, before turning positive. On an annual basis, net exports may still contribute negatively to GDP this year, but next year this contribution could be around zero.

Labour market

The labour market continued to grow in Q1 2025, with the employment rate increasing compared to both the same period last year and the previous quarter, while the unemployment rate also declined.  In our previous forecasts, we already indicated that many people, such as pensioners and students, entered the labour market in the second half of 2023, resulting in a sharp increase in activity and maintaining employment levels, accompanied by a simultaneous rise in the number of unemployed. In the second half of 2024, however, the trend may have started to reverse slowly: activity fell steadily from the middle of the year onwards, back to its levels before the price shock. The correction was gradually followed by the number of employed and unemployed persons, a process that seems to continue in 2025, so we expect unemployment to decline this year. In 2025, strategic changes aimed at sustainable labour market growth may once again come to the forefront: the government’s target is that the activity rate of the 15-64 age group in Hungary reaches 85% by 2030 (78.6% in 2024). This requires helping current jobseekers into the labour market, as well as identifying the potential labour reserves in the inactive population and helping them into work through the right labour market action plan. Labour market developments are positively influenced by the relevant points of the New Economic Policy Action Plan announced at the end of last year, such as the three-year wage agreement, the increase in the family tax benefit and the exemption of women with children from paying personal income tax. We expect unemployment to continue to fall over the next two years (2025: 4.1%, 2026: 3.6%), while gross wages are forecast to rise by 9.5% in 2025 and 7.2% in 2026.

Government budget

The ESA 2024 budget deficit was 4.9% of GDP, down from 6.7% in 2023. Government debt reached 73.5% of GDP, representing a 0.5 percentage point increase from a year earlier.

Tax revenues are on track in the 2025 fiscal year, with consumption taxes up 12.9% and household payments up 11.0%, exceeding projections. In contrast, increased spending can be attributed to the government raising its deficit target from 3.7% of GDP to 4.1% in May. We consider this deficit target to be achievable, but significant risks are associated with higher-than-planned expenditure by budgetary agencies and interest payments, as well as with the receipt of EU funds. Deficit reduction will definitely continue in 2026, but the fundamental condition for achieving the 3.7% deficit target set in the Act on the 2026 Budget is that the 4.1% deficit target for 2025 is met.

We expect government debt to decline again over the next two years, falling to 73.2% of GDP in 2025 and further to 72.7% of GDP in 2026.