By Alexander Jones, International Banker
In the third quarter of 2024, Hungary posted a quarter-on-quarter decline in gross domestic product (GDP) of 0.7 percent, which followed a 0.2-percent drop in the previous quarter. With two consecutive quarters of negative GDP growth registered, Hungary found itself in a technical recession, as the weak industrial performances of key sectors, including agriculture, industry and construction, weighed on the country’s business outlook. Prime Minister Viktor Orbán is keen to reignite growth this year in anticipation of next year’s parliamentary election, but the economy has an uphill struggle ahead to return to positive territory.
Indeed, recent reports suggest a close race is in the offing between Orbán and the opposition candidate, Member of the European Parliament (MEP) Péter Magyar, with the latter’s Tisza Party (Respect and Freedom Party) leading in the polls versus the ruling Fidesz (Hungarian Civic Alliance). And with Hungary now in recession, the government is hoping to kickstart an economic recovery sooner than later. Such an endeavour may prove challenging, however, given how far into the doldrums Hungary’s 2024 industrial performance fell, with key economic sectors, such as automotive manufacturing, electronics and pharmaceuticals, struggling in the face of weak demand.
The most recent official figures show that industrial output declined in October by 0.2 percent year-on-year, with electrical equipment (-16.9 percent), basic metals and fabricated metal products except machinery and equipment (-4.9 percent) and transport equipment (-3.9 percent) among the biggest drags on growth. The Hungarian Central Statistical Office (KSH) also reported that when adjusting for the number of workdays, output dropped by a hefty 3.1 percent, while for the January-October period, industrial output slid by 3.9 percent year-on-year.
Reflecting on this data, the Ministry for National Economy cited the “hectic” regional environment as chiefly responsible for this underperformance, with the simultaneous economic downturns in several European countries underpinning the weak demand for Hungary’s export-oriented industry’s products. Most significant for the Hungarian economy has been the acute deindustrialisation taking place in Germany, with automotive companies forced to scale back production off the back of declining factory orders and rising energy prices. And with Hungarian suppliers relying on orders placed by German factories, particularly in the automotive sector, firms are now facing serious headwinds, with an ING analysis published in early November showing the volume of industrial production in Hungary at 4.8 percent below the average monthly output during 2021.
“It is no coincidence that recent domestic surveys also point to a lack of demand as the main obstacle to growth for industrial firms at present,” the Dutch bank noted on November 6, citing surveys showing that industrial-capacity utilisation had deteriorated further in the fourth quarter. “The combination of fragile domestic consumer confidence (which could weaken with a further depreciation of the forint), strong caution and sluggish corporate investment also make[s] the domestic outlook gloomy,” according to the ING analysis. “Hungarian industry as a whole is now almost certain to be a significant drag on GDP growth in 2024, which is likely to be between 0.5 and 1.0 percent this year, but rather closer to the lower end of the range.”
The European Commission (EC), meanwhile, estimated Hungary to have recorded real GDP growth of 0.6 percent for 2024, with an assessment published on November 15 identifying “sluggish” investment as being a key underlying factor for this lacklustre performance. Specifically, the EC cited delays in planned public investments and weak business confidence as crucial factors that weighed on growth during the year, alongside subdued demand for key Hungarian exports, such as machinery and transport equipment, from the country’s main trading partners.
Its increasingly fractious relationship with the European Union (EU) has only further compounded Hungary’s economic woes. The new year saw Budapest being officially denied more than €1 billion in funding from the bloc—the first time such a decision has been conferred on a member state. The EU had frozen around €6.3 billion starting in 2022 due to concerns over potential breaches of the rule of law, with member states citing risks associated with Hungary’s public procurement system as a key issue. Hungary thus lost €1.04 billion of this money permanently, as the arrangement expired at the end of 2024. It was also fined €200 million by the Court of Justice of the European Union in June for breaking asylum rules and is losing out on daily EU funding of some €1 million due to its contested treatment of asylum seekers.
Indeed, Moody’s Ratings partly attributed its lowering of Hungary’s debt outlook in late November to the growing risk of losing out on crucial EU funding. “If Hungary’s institutions are not able or willing to meet the remaining conditions set by the EU for the release of its funds, Hungary may ultimately lose out on a substantial amount of grants and low-cost loans,” Moody’s analysts wrote as the credit-rating firm cut the outlook for Hungary’s debt from stable to negative, adding that the frozen funds might reduce economic growth and exacerbate existing debt problems. “Like its peers in Central and Eastern Europe, Hungary has in the past received significant EU funds, which have boosted GDP growth and supported fiscal and debt metrics.”
In response, Budapest has insisted that such punitive measures are the result of political disagreements with Brussels, with Orbán seeking to pursue a more economically neutral strategy towards the adversaries of the EU and the West, such as Russia and China. The prime minister previously levied much criticism on the bloc for its protectionist approach towards Chinese electric vehicles, which he has cited as potentially instrumental in leading to an “economic Cold War” with Beijing. According to the Financial Times, Hungary’s minister for European Union affairs, János Bóka, said in mid-December that it was “very difficult” not to interpret the withdrawal of funds as “political pressuring”, adding that Budapest would take action to “remedy this discriminatory situation”.
Looking further ahead, the EC has forecast Hungary’s GDP growth to pick up to 1.8 percent in 2025 and 3.1 percent in 2026. Indeed, 2024’s growth was modestly supported by steady gains in consumption, underpinned by a strong labour market, rising wages and a more accommodative monetary environment. “Consumption is expected to remain the key growth driver, supported by strong real income growth. The saving rate of households is also set to decline gradually from its current high level. Although rising demand is projected to drive investments, uncertainties, particularly around the outlook for the automotive industry, are expected to weigh on investment levels,” the EC’s November forecast also observed. “Exports are forecast to increase gradually, driven by improving demand and large foreign direct investment projects in manufacturing. However, the projected recovery of domestic demand is set to boost imports and reduce the current account surplus in 2025.”
The Organisation for Economic Co-operation and Development (OECD), meanwhile, has projected Hungary’s GDP growth to increase gradually to 0.6 percent in 2024, 2.1 percent in 2025 and 2.9 percent in 2026, mainly supported by private consumption. “Lower inflation is contributing to a pickup in household real incomes, and saving rates could decline gradually as household assets return to their long-run level compared to income,” the 38-member intergovernmental organisation noted in its “Economic Outlook” published on December 4.
“After an expected decline of 11 percent in 2024, investment is projected to rebound progressively over 2025-26, along with improving financial and economic conditions,” the OECD added, pointing to the 21-Point Economic Action Plan announced in October 2024, aimed at supporting home renovations and new property acquisitions, as a key factor in boosting residential investments.
Whilst such encouraging numbers suggest that Hungary may not remain in recession for much longer, they may not be strong enough to satisfy Orbán’s lofty growth targets. “We need to lift economic growth into the 3 percent to 6 percent range,” he told a conference in late September. “We can enter this range already next year, stay there in 2026 and target the high end of the band thereafter.” And with a genuine political contender set to face Orbán in next year’s parliamentary election, the administration may have to boost spending in the run-up to the vote, which could weaken government finances.
Hungary’s budget deficit has averaged around 7 percent throughout much of the current decade, while Moody’s forecasted a figure of 5.5 percent for 2024, as Orbán has more recently emphasised the importance of maintaining fiscal discipline. Nonetheless, many expect this narrowing deficit to be put under strain given that the government has pledged to raise family tax benefits, expand housing incentives and introduce a major capital-injection programme for small businesses this year. In October, for example, S&P Global Ratings noted that the 2026 elections “could complicate the government’s ability to reduce the large budgetary deficit” whilst affirming Hungary’s rating at the lowest investment grade of BBB-.
Hungary’s minister of finance, Mihály Varga, has already submitted the pro-growth budget proposal for 2025 to the National Assembly, dubbing it a “peacetime budget” that primarily aims to counter recent recessionary conditions. “We will restore the Hungarian economy to the high growth trajectory seen in the past decade,” Varga confirmed, adding that there is a “good chance” for the world to move towards peace based on the results of the United States federal elections and emphasising Hungary’s position of economic neutrality. “The 2025 budget introduces a new economic policy, focusing on construction and growth. We are building the budget on a projected 3.4 pct. economic growth.”
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Publish date : 2025-01-13 02:14:00
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