Hungary's government slashes 2025 growth forecast to 1%

Hungary's government has sharply cut its 2025 economic growth forecast to 1% from 2.5%, attributing the revision to a prolonged anaemic recovery from the 2022 inflationary surge and near stagnation in the first half of 2024. This downward adjustment, aligning with central bank and OECD projections, signals the weakest pre-election economic period for Prime Minister Orban since 2010, despite ongoing government measures like tax cuts and a spending freeze. The country also faces a high debt-to-GDP ratio around 74% and a higher-than-forecast 2024 budget deficit of 4.9%.

Analysis

Hungary's government has materially downgraded its economic outlook, slashing the 2025 GDP growth forecast to 1.0% from a previous 2.5%. This revision reflects a stalled recovery from the post-2022 inflationary shock, evidenced by flat economic performance in the first quarter of 2024 and an expectation of "near stagnation" for the full year, primarily due to weakness in the agriculture and industry sectors. The new forecast aligns the government's view with more pessimistic projections from the Hungarian central bank (0.8%) and the OECD (0.9%). This macroeconomic weakness presents a significant political challenge for Prime Minister Orban, as it marks the weakest three-year economic period leading into an election since he took power in 2010. Despite the grim outlook, the government is proceeding with fiscal stimulus, including tax cuts and pension increases, while maintaining that the 2025 budget requires no amendment due to a prior spending freeze. However, fiscal metrics remain concerning: the 2024 budget deficit is higher than previously forecast at 4.9% of GDP, and sovereign debt is set to stagnate at a high 74% of GDP, the highest in the EU outside the euro zone. The government has committed to a sub-4% deficit target for next year but acknowledges the need for 192 billion forints in reserves to mitigate risks from lower growth.

Key Decisions for Investors

• Investors should exercise caution regarding Hungarian sovereign debt, as the combination of stagnating growth, a high 74% debt-to-GDP ratio, and a 4.9% budget deficit for 2024 elevates the country's risk profile.
• Given the weak economic forecast and ongoing fiscal pressures, the Hungarian forint (HUF) may face downward pressure, prompting investors with exposure to consider currency hedging strategies.
• The outlook for Hungarian domestic equities appears challenging, particularly in cyclically-sensitive sectors like industry; a highly selective approach is warranted, focusing on companies with resilient earnings or significant export operations.
• Monitor political risk ahead of next year's elections, as the government's use of fiscal stimulus to counter economic weakness could lead to further budget slippage and heightened market volatility.