Stronger GDP growth but no further disinflation in 2025-2026
The European gas market has weathered the initial shock of Ukraine's halting the transit of Russian gas on the first day of 2025, without any major variations in the Dutch TTF gas price. However, a recent unsuccessful attempt by Ukraine to disrupt the TurkStream gas pipeline, together with Donald Trump’s gas-related threat issued to Europe, and current plans within the EU to fully eliminate Russian energy suggest that further serious complications about the supply of gas imports to Europe may be coming over the next two years. Should TurkStream fall out, Hungary would not run into a short-term crisis, but over a long-term perspective, replacing Russian gas with alternative sources could prove difficult, time-consuming and expensive.
The economy is likely to have climbed out of its short-lived technical recession in Q4, but even so, its growth performance in 2024 could be described at best as "positive stagnation". This year will most probably bring about a moderate recovery, simply because the previous year’s poor agricultural results, its serious setback to the car/battery complex in industry, and the massive cutbacks of the government’s development spending are unlikely all to be repeated with the same severity. Consumer demand is likely to grow more robust, policies less restrictive, and the utilization of the currently unblocked part of EU funds may even accelerate in 2025. Next year will likely be even stronger, not least as election campaign spending is likely to reinforce GDP growth further.
Over the past two years, the decrease of the available domestic labor force, a consequence of demographic characteristics, was offset by the imports of large numbers of guest workers. However, the increasing presence of the latter has started to cause political problems. In view of the upcoming election in 2026, the government has just introduced restrictions on the use of guest workers that are likely to stay in force for the next one and a half years, at least. As a result, the labor market is likely to get tighter again in this period.
The balance of payments probably finished the year with small surpluses in all of its key lines in 2024. This represented a major improvement over the past two years, due to sizable terms of trade gains from normalizing energy prices and weak domestic demand. However, the BOP is likely to start deteriorating in 2025-2026, as the economy becomes more robust, but no export-led recovery is taking place. Meanwhile, no windfall gains are likely from the inflow of EU transfers, where the best possible result appears to be regular distributions from the currently unblocked part of the country’s allocation of structural funds.
In 2024, a great deal of fiscal adjustment was implemented, mainly through tough-line expenditure control that primarily affected spending on fixed investment. The ESA deficit was reduced almost to the upwardly revised target. The government budget approved for 2025 looks largely realistic assuming current conditions, although some projections in it, especially those on the revenue expected from EU funds, seem to be too ambitious. But we are not particularly worried about the latter, as the government is in the position to approve and implement amendments at any time unusually flexibly. The real risk seems to be that Fidesz, or actually PM Orbán himself, might get worried about reelection chances later this year, in which case fiscal and income policies could be loosened for 2026, and pressure could even be put on the MNB, expecting a helping hand from central bank policies.
Following some really favorable numbers for a few months, CPI-inflation surprised everyone negatively in December, with both the headline rate and core inflation finishing 2024 outside the MNB’s target range. This was a warning sign, in our view, that consumer demand is now quite strong, and any significant weakening of the forint may pass through domestic prices very quickly. Indeed, we do not expect any further disinflation in 2025-2026, given the prospect of an economic recovery, an increasingly inflationary producer price environment, rising energy prices, a tight labor market with continued rapid (although decelerating) wage growth, and a decent likelihood of expansionary election campaign policies at a later stage in this period.
Regarding the new management of the MNB, we do not expect them to act against the government’s economic policy line, e.g., trying to achieve further disinflation by aiming at a real-term appreciating forint. But we do not expect them to loosen central bank policy by any significant amount, either, in search of short-term gains of a political nature for the governing party. We are aware of the economic minister’s long-known view that the MNB could go faster with interest rate cuts, but we do not think that the former would have a mandate from the prime minister to press for monetary easing that might risk a renewed upturn of inflation during the period of the upcoming election campaign. Not least for this reason, we think, there has been no significant signal coming from high-ranking government circles that have referred to any political requirements set for the MNB, except that there may be a need for the Bank’s help in the form of some refinancing loans to foster the government’s current action plan to support SMEs. We expect that any campaign-driven policy easing that might be initiated at a later stage will be implemented through fiscal and income policies, rather than through the MNB.
Against this backdrop, we expect only small reductions in the base rate in 2025-2026, maintaining the current real positive short-term interest rate, and even those only in case everything goes reasonably well, which is our main scenario. This would allow a material amount of nominal forint depreciation. Because of the risk of a more significant weakening of the currency, we see no room for any base rate cut in H1 2025. A special risk factor in this regard will be the massive repricing of inflation-indexed retail bonds this year, and from 2026, the new trend of BOP deterioration will likely start to be a factor to take into account.
After stepping down as the EU’s rotating president, and becoming less important for Mr. Trump as the latter was reelected, PM Orbán seemed to have taken a low profile for a few weeks, stressing the importance of "economic neutrality", letting his Slovak colleague take the lead in the gas transit conflict with Ukraine, and going for a family vacation in early January. However, he returned full of energy and announced a new phase of his "occupy Brussels" campaign; reinforced his sharp conflict with Poland, the new rotating EU president; expressed his high hopes attached to Mr. Trump’s presidency; and joined Slovak PM Fico in blaming Ukraine over gas supplies. This does not promise much good in relations with the EU’s "liberal" mainstream, and it is not exactly well proven that President Trump will move in the direction preferred by the Fidesz government.
In domestic politics, the picture painted by opinion polls has become as blurry as possible, with Fidesz’s in-house research institute measuring the exact opposite of the results of other pollsters. The opposition Tisza has made some progress in building out its party and promised to come forward with its main policy advisors by next month. Fidesz has launched its economic policies for 2025 and seems to seriously believe for now that those will be sufficient to be reelected in April 2026.
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