Past the bottom of the inflation cycle
The past month has brought about no major surprises in Hungary; everything was largely in line with expectations. The economy is still quite weak, but consumer demand, construction activities and tourism showed distinct signs of consolidation in Q1. However, other areas, such as industrial output and bank lending, were disappointing. Regarding prospects, the authorities and private sector analysts seem to be in agreement about the high likelihood of only moderate GDP growth this year, followed by more significant expansion next year.
The fiscal situation is still difficult, mainly because of high interest expenditure and the low probability that the budgeted amount of incoming EU funds will be actually received. But VAT revenue has started to recover, and the government deficit is also decreasing. In this light, attaining this year’s upwardly revised but still ambitious fiscal deficit target looks significantly more feasible than earlier. Unlike previously, the government budget for 2025 will be prepared only late in the year, which is a welcome change of habit, given the existing major uncertainties.
The balance of payments remains a bright spot in the economy, as the trade balance, the current account, net external financing and the basic balance all turned positive in Q1. Even the deficit of investment income decreased moderately. However, an unfavorable feature of Q1 actuals was that the trade account improved on sharply shrinking imports rather than on growing export sales. This implies that once domestic demand recovers more substantially, a deteriorating trend is likely to take over, even though from a fairly solid base.
Just as expected, the more than year-long downtrend of inflation ended in April, when the headline rate rose marginally. A more significant rise is likely in May, this time due to a base effect. Analysts, including ourselves, continue to expect a further moderate uptrend over the rest of 2024, as nominal wage growth will remain high, consumer demand recovers, and producer and import prices show signs of consolidation.
The forint has strengthened against the euro materially in the past month, supported by BOP fundamentals, the ceasefire between the MNB and the Economy Ministry, and by recent MNB talk that the exchange rate may be used to prompt further disinflation. The latter hinted at the continuation of a relatively tight policy on interest rates. The Bank carried out two 50bps base rate cut in April and May, as expected, and the market expects a third one of the same size in June, in line with the MNB’s own short-term forecast. In H2 2024, the average analyst does not expect any further reduction of the base rate, as the MNB is expected to want to keep the base rate positive in real terms.
The government will eventually get the right to take over the EU’s rotating presidency for H2 2024, despite the views shared by many European politicians that the Fidesz government should not be allowed to fill this position. However, this will not bring the government any closer to accessing the currently blocked part of development funds from the EU. Regarding the latter, no progress has been reached lately, and none is likely to be reached for several months, as the EU will be preoccupied with the upcoming elections and the setting up of the new Commission thereafter. In early May, President Xi Jinping visited Budapest, which is important because of some major ongoing and prospective direct investments and development projects in Hungary.
Finally, the European and the local government elections, both scheduled for June 9, will serve locally as a test run for the 2026 parliamentary election. Fidesz will most certainly prove the strongest party again, but its predominance has been questioned recently by the appearance of Péter Magyar’s Tisza Party. We provide in this report an overview of voter preferences and a summary of Tisza’s main policies, as those are currently known.
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