European and local elections have changed domestic politics substantially
In the European election of June 9, Mr. Orbán’s hopes that the radical right would beat the mainstream bloc were essentially dashed, despite the former indeed making some moderate gains. His immediate response was a sharp turn in external policies, holding back Hungary's blocking votes against NATO’s decision to massively strengthen its anti-Russian front and the EU’s plan to start membership talks with Ukraine, in addition to signing the closing document of the just ended peace conference held in Switzerland.
One issue that will most likely complicate Hungary’s relations with the EU is a substantial fine imposed by European Court (ECJ) on Hungary for maintaining an overly restrictive immigration regime for asylum-seekers. This court decision is supposed to be unrelated to other conflicts with the EU, but it is notable that it turned out to be very much bigger than the amount originally proposed by the EU Commission. The medium-term fiscal consequences are still unclear, but even the maximum burden potentially stemming from the fine is too small to require a material change of fiscal policy.
In domestic elections, Fidesz clearly won the European vote, but it lost support compared to previous elections, and Tisza, the new center-right party, proved to be an unexpectedly strong opponent. In local governments, Fidesz failed to remove the opposition mayor of Budapest and lost important positions in a number of cities. So, the governing party clearly remained in the game, but its life will be now more difficult until the 2026 parliamentary election, especially if a large part of EU funds remains inaccessible and further fiscal adjustment is required.
In the energy section, we report on four stories from the gas sector: the continued high level of domestic inventories, a further decrease of gas consumption, a Hungarian investment in the biggest Azeri gas field, and the consequences of an arbitration procedure between a German gas service provider and Gazprom.
Detailed GDP data for Q1 reflects weak industry but stronger services on the supply side, and recovering household consumption but sharply reduced investment levels on the demand side, the latter in a large part due to fiscal adjustment. Figures for April reflect the continuation of the same trends. Prospects for the export segment of industry will remain subject to external demand, which remains uncertain, but the rest of the economy is likely to strengthen further over the rest of this year and in 2025.
The BOP is currently in excellent shape, with a marginal negative external financing requirement and a considerable basic balance surplus. The only problem is that BOP strength is the product of decreasing domestic adsorption, which has led to sharply falling imports, while exports are also decreasing.
In the fiscal chapter, we write about the details and consequences of the government’s acquisition of a majority stake in Budapest Airport. We also report the fact that the government’s deficit-cutting efforts are proceeding successfully, despite higher interest costs and continued poor inflow of development funds from the EU. The latter must have contributed to Fitch Rating’s recent decision to affirm BBB/Negative for the government, which we regard as a positive development under the current circumstances.
The headline rate of CPI-inflation moved higher for the second consecutive month in May, as expected. However, we still regard this as good news, because the acceleration of inflation was less than expected and core inflation actually fell a little. Regarding the outlook, continued rapid wage growth, households’ rising propensity to consume, producer prices and the forint’s exchange rate all provide reason for moderately higher inflation at end-2024.
At its monthly rate-setting meeting of June 18, the Monetary Council reduced the monthly pace of base rate cuts to 25 bps, substantiating analysts’ expectation that the MNB would not want the forint to move to the weak side of EURHUF 400. In its new quarterly forecast, the Bank expects a 1%-point rise in core inflation between May and end-2024 and stresses various upside risks attached to its main forecast scenario. In the coming months, the Council expects to choose between small rate cuts and holding the base rate, rather than choosing between different rate cut options, as it has so far.
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