Past Liberation Day: a few changes to growth and inflation forecasts
The world has changed quite a bit since we published our previous forecast in January, because of Mr. Trump’s appearance on the scene, and especially his latest aggressive trade policy measures. The latter are pushing the global economy towards lower growth but also lower energy prices, both extremely important for Hungary, a small open economy and also a net energy importer. For now, it is unclear how much of Mr. Trump’s tariffs will be enforced on a sustained basis, and how much damage the resulting trade war may actually cause. Our current assumption is that although US import tariffs will likely be scaled back from initial announcements, the level of mutually applied trade barriers will end up at a significantly higher level than the one prior to the takeover by the current US administration.
Just as the government did a few weeks ago, we are scaling back our growth expectations for 2025-2026, on a variety of factors. The latter include a materially worse-than-expected start of this year in industry and construction, the prospective slowdown of the global economy, the likely impact of penalty-level US tariffs on the European car industry, the lack of prospects for any significant rebound of agricultural output in 2025, and the increasing likelihood of restrictions on fixed investment by the government until end-2026. The result appears to be just marginally improving GDP data this year, and a bit stronger performance, due to the fiscal campaign gifts to consumers, in 2026.
Energy security appears to have improved materially because of the latest decrease in crude oil and gas prices. Regarding gas, this was partly due to seasonality and a positive change in EU regulation, but in part it was caused by the prospect of a weaker European economy and is likely to continue for a longer period. New supply concerns have not surfaced recently. We do not think the recent threat by the US government and lawmakers to impose a sky-high "secondary tariff" on the exports of countries that buy Russian energy is anything more than a safely forgettable ad-hoc idea. Anyway, Russia has been hit by the recent fall in energy prices much more than anything the US government may have wanted to see.
Our balance of payments forecast is very similar to the one we issued three months ago. The basic trend remains one of moving away from a "positive zero" balance towards moderate but increasing deficits. On one hand, a weaker economy and cheaper energy imports should imply an improving BOP, but on the other hand, much of that weakness is expected to come from the export sector, and continued robust consumer demand will likely have a significant impact on the demand for imported goods and services.
Inflation surprised on the upside in early 2025, but prospects for the rest of 2025 and next year may look much better. Indeed, the headline rate of CPI-inflation may fall to the upper end of the MNB’s target range by year-end, provided the forint is kept relatively strong and fuel prices remain at the current level. Wage growth is slowing significantly, and is less and less likely to undermine domestic price stability. However, we do not attach high hopes to the currently applied administrative measure to contain food prices: these are good for producing short-term results, but they are inappropriate to keep prices low for a longer period.
Fiscal policy will be a key question over the next two years. The officially announced program of further fiscal consolidation is coming under serious pressure due to slower-than-expected growth, gifts to voters ahead of next year’s election and the continued lack of access to EU development funds. However, the most recent lowering of S&P’s sovereign rating outlook was a clear warning that the government will need to take fiscal discipline seriously. So far, the government has reacted by raising its 2025-2026 deficit targets further, but it reaffirmed its commitment to achieving minor amounts of further fiscal consolidation in both years.
As far as we can tell at this moment, the change in the MNB governor’s seat has turned out well. Most importantly, PM Orbán seems to have accepted that failure in containing inflation would be a deadly threat to his reelection chances next year. As a result, the MNB appears to have been left alone, and this is likely to remain so on a sustainable basis. Currency exchange rate considerations may allow some base rate reduction in Q4, unless the current Trump-style global market chaos is maintained, in which case monetary loosening will not be an option through the end of this year.
In foreign policy, PM Orbán keeps increasing the distance between Hungary and the European mainstream, trying to align his views and action with those of the US government, apparently with a view to concessions and advantages from that latter source. However, so far those hoped-for advantages have failed to come about: Hungary just appears to be too small for the Trump administration to pay attention to. By now, the EU has also learned to get around PM Orbán’s vetoes. Should his blocking votes still cause much problem, further action would be likely to keep Hungary’s government silent or to lessen its importance further.
Finally, the opposition Tisza party leads in all polls, except for one survey that is published by Fidesz’s in-house pollster. However, given the peculiarities of domestic election law, Tisza’s currently observed lead may prove insufficient to win the election. As a general rule, the stronger Tisza gets, the more one should expect increasing domestic political instability. It is a general expectation that Fidesz will use every possible means to keep its power, or to undermine its successor if it is forced to hand over the government after the election in April 2026.
Now read on...
Register to sample a report