Growth forecast revised down significantly
In this quarterly update, we are revising our GDP forecast downward by a significant amount, following similar recent moves by other forecasters but taking a somewhat more pessimistic view than most of the other forecasts we know (Table 1). We are doing so on account of the continued, and currently aggravating, weakness of European and domestic industry, the unexpected depth of the downturn in fixed investment, mainly in the government but also in the private sector, and the most recent weather-related negative supply shock in agriculture.
Parallel to expecting a weaker economy, we have made moderate corrections to our BOP and inflation forecasts, both in the favorable direction. But even so, we are not taking the MNB’s optimistic view that BOP fundamentals should continue to improve in 2025, given the coexistence of robust consumption growth and the slump in the predominantly export-driven industrial sector. Similarly, the growing strength of household consumption, supported by much less contractionary fiscal policy is unlikely to allow headline CPI-inflation to fall into the MNB’s target level in a sustainable way next year, even though the overall inflation picture should improve further, in the form of decelerating core inflation, decreasing price pressures in services and capital goods, and a lower GDP deflator.
Unlike many others, we are not terribly worried about the fiscal results of 2024. This year, the government is implementing an impressively large adjustment, even though the main deficit figure is unlikely to be exactly on target, given the profound interest in retaining as much space as possible for a subsequent easing of policy in 2025. The government debt ratio will likely fall by a very small amount only, positioned to do so by using the Treasury’s impressively abundant cash reserves if necessary.
Policies during the 16-month period starting next January will be dominated by election campaigning. However, reliance on fiscal means in the campaign will certainly remain much more modest than four years earlier, as the budget will not have the same ample flow of revenue from a rapidly growing economy or from EU transfers, and the government will always have to keep rating agencies satisfied. As a result, the speed of fiscal adjustment will likely slow down to "positive zero", but the standing medium-term plan of deficit reduction will most probably be maintained. MNB policies should be affected, too, following the likely change in the governor’s chair in March 2025. In our main scenario, this should lead to a reduction of the base rate’s real positivity by end-2025, and the MNB's making some concessions to the government by starting a moderate amount of cheap-loan distribution.
In spite of scaling back our forecast, we still expect that GDP growth will accelerate somewhat in 2025, on more expansionary domestic policies and some likely stabilization of European industry. The inflow of EU funds may become a bit stronger than this year, but no major pickup is likely, as the conditions for unblocking lots of EU funds are still missing, and the EU will not want to finance another Fidesz election victory on political grounds in 2026. BOP fundamentals should start to deteriorate again next year, but their starting position is so strong, and the previous trend has been improving so substantially that no deficits should be expected before 2026.
However, all of the foregoing refers to our main forecast scenario. Against that, the key risk is a possible situation at some point next year, in which Fidesz appears to be losing the 2026 election unless a really big easing of economic policies is urgently carried out. At this point, this scenario looks less likely, but no doubt, Fidesz will face a more difficult task in 2026 than four years ago, for the lack of the same amount of support from the economy and the EU, and for the recent appearance of a new political force that has successfully unified most opposition voters. Should the situation get seriously negative for Fidesz, the most likely response would be the government's giving up its current deficit-cutting ambitions and increasing its pressure on the MNB to reduce the base rate faster and possibly to start larger-scale quantitative loosening, as well.
Another risk is a possible scaling back of the existing plans by Chinese car and battery makers to develop major productive capacities in Hungary, and/or to apply countermeasures on imports from the EU, in response to the EU’s recent decision to impose extraordinary import duties on the imports of electric cars from China. The threat of new import duties on European cars in the US, in case Mr. Trump wins next month, is also significant.
We are planning to issue specific predictions for 2026 in our next quarterly forecast report, due in January. For that to happen, we will first need to see the government’s draft budget for 2025, which it has promised to deliver only after the US presidential election in November.
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