Improving price stability but no good prospects for GDP
Energy prices remain favorable for importers such as Hungary, especially regarding crude oil. We still consider the occasionally repeated US threat of retaliatory tariffs on those who buy Russian energy as unlikely to materialize. However, an alternative plan by the EU to end all purchases of Russian gas and oil by end-2027, and of Russian nuclear fuel as quickly as possible, represents a genuine threat, because of extra costs, and to a lesser extent, the availability of supplies. This plan refers to the long term, but the negative effects would start to show up as soon as next year.
Preliminary Q1 GDP data was disastrous, showing the economy moved back towards recession. Details from the national accounts are not known yet, but other information shows that output was depressed by weak industry and construction, whereas it was supported by services. On the demand side, consumption held up nicely, but investment and net trade made negative contributions. Influenced by this result, analysts are scaling back their GDP growth forecasts for 2025 to a very small positive number, roughly around what we predicted a month ago. Administrative price regulation will most likely prove significantly negative for growth in the forthcoming period.
Labor market data now reflects the impact of the restrictions recently imposed on the employment of foreign guest workers. In Q1, the decrease in working-age population accelerated, and the number of economically active individuals fell moderately, after materially rising over the previous three years. Given the weak economy and stagnating demand for labor, this has not significantly increased labor shortages, so far. However, these restrictions are expected to remain in effect until at least next April’s election: they are likely to increase the tightness of the labor market as existing employment permits expire, and as ongoing large industrial investment projects are completed and start hiring from late 2025.
The balance of payments still looks great, as decreasing energy prices and the resulting gain in the terms of trade provide support for the trade balance. However, the basic balance deteriorated in Q1, because of significant net repatriation of inward FDI.
Following another upward correction of the fiscal deficit targets for 2025-2026, data for January-April confirmed that only a very small reduction of the deficit ratios may be realistic during this period. But even this will need to be secured at a later stage yet, as lower-than-budgeted GDP and the likely undershooting of incoming net EU transfers will most probably cause a significant revenue shortfall this year, and an even larger one in 2026. In a technical sense, the government will be in the position to amend the approved budgets flexibly. But every such adjustment should have its cost in the form of lower growth or higher inflation and would run counter to the government’s obvious desire to help its election campaign by fiscal means at the same time.
CPI-inflation came down further in April, and so its spike of early this year seems to have been overcome. Nonetheless, the administrative price regulation introduced in March failed to meet official expectations, and inflation still remains above the MNB’s target range. The Economy Ministry reacted to this by extending price regulation to a wide circle of drug-store type household goods, and the existing regulation for food articles will also likely be maintained beyond end-May. Producer price inflation has been tamed by the strong forint, and the pressure from wage growth has also weakened recently.
The reshuffle of the MNB’s management, according to the new governor’s will, continued in April. There has been no change in monetary policies. Mr. Varga, who appears to retain the right to speak publicly after the Council’s meetings, keeps sending very much the same message as his predecessor did in previous months, stressing the need for a patient interest rate policy, with no base rate cuts, possibly for a longer while. A small shift in his reasoning could be observed though, with more stress on external political and market uncertainties. In our view, this talk keeps open the door for one or two small cuts towards the end of this year. There seems to be no intention to activate quantitative policies. The MNB’s balance sheet continues to shrink; this will most likely accelerate this year with the expiration of large amounts of cheap refinancing loans extended to banks under the COVID era.
The government is still not doing well in foreign relations. The long-promised bilateral deal with the new US government on economic matters is not yet forthcoming, and honestly, there is no sign of its being in preparation. Within the EU, the Commission’s plan to prohibit buying energy from Russia is looming, and it is planning to decide on that as a matter of trade policy, so that a qualified majority vote should be sufficient. A new story has been the spying scandal between Hungary and Ukraine, as the latter’s counter-intelligence caught two Hungarian nationals who allegedly collected military information in the Transcarpathian region of Ukraine. This may have been a reaction to the Hungarian government’s fierce opposition to extending sanctions on Russia, and to Ukraine’s accession to the EU. Under pressure from the EU mainstream and now from Ukraine, PM Orbán expressed support for Romania’s far-right presidential candidate, publicly offering him protection within the EU, probably in exchange for similar support in return.
With less than one year to the election, opinion polls show a continued slow shift in favor of the opposition Tisza party. Because of the uneven playing field, Fidesz is still more likely to win, but its edge is apparently decreasing. An important change, not captured by the polls, has been Mr. Orbán’s support of Mr. Simion in Romania, as the latter is a harshly "hungarophobe" politician against whom the local Hungarians called to vote in the presidential election. Many of these people also vote in Hungarian elections, and their usual strong support of Fidesz may be reduced by Mr. Orbán's gesture towards their fierce local adversary. Another key story has been Fidesz’s claim that the Ukrainian spying scandal is an unfounded smear campaign against it, backed by the EU mainstream and the domestic opposition Tisza, which is much more friendly to Ukraine than the governing party.
Raising the stakes in its fight for reelection, Fidesz has initiated its own version of a foreign agent act, which, according to political analysts, could be used to block the funding of independent civic organizations, including the media, and to criminalize those voicing dissident views. The government media present Tisza’s leaders as "Sorosist" and pro-Ukrainian agents, and PM Orbán has just announced the formation of Fidesz’s "Fight Club", a group of online activists with the task of fighting opposition views in the run up to the election.
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