PM Orbán has raised the stakes again
In the following quarterly update of our macro forecast, a few important revisions are introduced, even though our view regarding the basic trends remains unchanged. First, the speed and intensity of the ongoing economic recovery appears to be contained by the current poor performance of the industrial sector, and by the government’s unexpectedly strong resolve to reduce the fiscal deficit through lower fixed investment spending. Second, we see the labor market somewhat less dramatically tight, because of the increasing imports of guest workers. Third, the results of fiscal adjustment are likely to be better than expected this year, not least due to additional measures, this time on the revenue side. Fourth, the BOP situation has become even stronger lately, which allows the MNB to seek a relatively strong forint, with a view to supporting domestic price stability. Fifth, inflation prospects indeed have improved moderately, to which the limited pace of the recovery, exchange rate stability, favorable food prices and the lack of major external price pressures are all contributing. Sixth and finally, the above-mentioned conditions are still likely to allow some further interest rate cuts in the rest of 2024 and also in 2025, although only on a limited scale, as maintaining the real positivity of the base rate will remain needed to offset the various political risks and to keep the forint stable.
Forecasting political developments appears to be the more difficult task at this point; the trends are clear, but the consequences are difficult to predict. Having taken over the EU’s 6-month rotating presidency, PM Orbán has speeded up the advance of his long-followed collision course with the European mainstream, apparently on the assumption that Mr. Trump will win in the US this year, and that Europe’s pro-Ukraine line will eventually fail. One thing that seems to be clear now is that Hungary will not be able to get access to more of EU cohesion funds than the amounts freed up so far, and its RRF quota has essentially gone down the drain completely. But more than this, the suspension of Hungary’s voting right in the European Council has become a more realistic threat than at any time previously.
In domestic politics, the situation has changed greatly with the sudden appearance of a serious rival for Fidesz in recent months. Somewhat counterintuitively, the initial reaction of economic policymakers has been to reinforce fiscal adjustment efforts in 2024, most certainly with a view to creating more room for fiscal support of Fidesz’s campaign for the next parliamentary election in Q2 2026. For sure, nothing like the massive campaign spending of 2021-2022 will be possible this time, but at any rate, we expect the government to fall moderately short of its deficit targets set for this year and 2025. On the MNB’s front, we expect the replacement of Governor Matolcsy at the expiration of his office term in March 2025, with a currently unknown person who is politically close enough to PM Orbán. However, this is unlikely to be followed by any serious easing of MNB policy, as Mr. Orbán is known to see monetary stability as a relatively high priority for his re-election chances not to be washed away by the reappearance of accelerating inflation.
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