The election campaign has started: major social policy measures announced
European gas prices have corrected substantially in recent weeks, more on the warming weather than on peace prospects. We still see no realistic prospect for the restart of the transit of Russian gas through Ukraine. Hungary finished the winter period with higher-than-usual gas reserves, and it continues to act as an important regional distributor of gas, from South and West to Slovakia, Ukraine and Transnistria. Due to decreasing prices, the cost of net energy imports fell further in 2024.
Detailed GDP data on Q4 2024 showed unexpectedly robust consumption growth, coupled with shrinking industry and sharply falling agriculture and fixed investment. Our standing 2.5% growth forecast for 2025 still looks feasible, but only if last year’s poor performers do not get any weaker, and if the momentum of consumer demand is maintained in the face of rising inflation and decelerating nominal wage growth.
In spite of a stable unemployment rate, the officially recorded excess labor force shrank further in February. The labor market is likely to tighten further, given the government’s decision to reduce the issuance of new work permits in 2025.
The January BOP data looks quite favorable, both in a year-on-year comparison and in annualized ratio terms.
Despite a big monthly deficit in February, which was to a great extent seasonal, the cumulative and 12-month fiscal gap decreased from one year ago, continuing the previous three-year-long period of downward adjustment. PM Orbán announced a series of major social policy measures, which are likely to have only a small fiscal impact this year but much more in 2026. About half of that latter will be covered by raising next year’s fiscal deficit target, whereas the target for the current year has remained unchanged. Financing the government has been quite successful lately: the Treasury covered about one third of its net issuance plan for 2025 already in January.
In February, inflation rose even further after the poor January numbers, but we do not find that very surprising. Available data suggests that the current environment is more inflationary than is generally perceived. However, the recent appreciation of the forint could bring down inflation somewhat if EURHUF is kept stable around 400 for the next six months. Fortunately, PM Orbán seems to have understood well that rising inflation is a deadly threat to his reelection chances, and he even undertook verbal intervention in favor of the forint. The government has adopted administrative measures to stop rising food prices, probably to demonstrate its commitment to price stability publicly. We are skeptical about the efficiency of such measures: there will be positive short-term results, but those are unlikely to be sustainable.
The new MNB governor has stressed continuity so far, apparently contributing to recent forint strengthening. Importantly, Mr. Virág has been kept on the Bank’s management, not only as a Monetary Council member but also as a vice governor. This is also seen as a confidence builder. So far, the government has left Mr. Varga’s MNB untouched, PM Orbán commenting benevolently, and Minister Nagy being preoccupied with his own counter-inflationary policy efforts. The next monthly rate-setting meeting of the Council, on March 25, when the Q1 inflation report is also to be discussed, will be important to watch.
Apparently, PM Orbán has maintained his ambition to act as a stick between the spokes in the European Council. His new friend and ally, the US government, reportedly held Hungary back from some of its more extreme-sounding plans, but Mr. Orbán decided to disagree to new EU initiatives to provide further help to Ukraine, including the acceleration of the latter’s accession talks for EU membership. At the same time, he has been agreeable to the EU’s large-scale rearmament plans in principle. By now, the EU’s majority has developed a technique to circumvent Hungary’s vetoes on a large number of issues. There seems to be a delicate distribution of the cards on the Ukraine issue (to use Mr. Trump’s words), in view of which we do not expect Hungary to be sanctioned any more than it is currently.
Polls on party preferences continue to show an inconclusive picture, with markedly different results between pollsters, influenced by their political affiliations. It seems clear though that Fidesz has strengthened somewhat lately, probably as a result of its new social policy measures and the well-publicized efforts to contain food prices. PM Orbán has started a long and very aggressive campaign, aiming at further restrictions of civil rights, through his foreign-agents law and a legal amendment to limit the right of assembly.
Now read on...
Register to sample a report