Hungary

Recession in 2024 but opportunities for 2025

In 2024, Hungary followed the recessionary trend of 2023, driven by a combination of structural and cyclical factors. Household consumption, which accounts for 50% of GDP, was pinched by the loss of purchasing power despite significant disinflation. After peaking at over 25% in early 2023, inflation has slowed markedly due to a sharp decline in food and energy prices. Helped by the effective monetary policy, inflation has returned since January 2024 to the upper half of the central bank’s target range of +3% ± 1 set by the Hungarian National Bank (HNB) – it stood at 3.2% in October 2024 – and is expected to remain there until the end of 2025. After a record-high interest rate of 13% at the end of 2022, the HNB began its cutting cycle in October 2023. It paused in the second half of 2024, maintaining its rate at 6.5%. Monetary easing could be slow in 2025 as inflation in services stays high, labour costs continue to rise and the forint keeps on losing ground. Although wages have kept increasing due to the tight labour market (12.5% y-o-y in October 2024), this rise has not offset the high inflation rate. Households remain cautious and are keeping a tight rein on spending.

Investment, meanwhile, has been hampered by record interest rates and uncertainty over access to European Union funds. With EUR 21 billion blocked, Hungary's green and digital transitions are stalling, while tensions with the EU over the rule of law are undermining private investor confidence and exacerbating budgetary pressures. Viktor Orbán's controversial initiatives, particularly following visits to Moscow and Beijing, have deepened the rift with Brussels. In the industrial sector (25% of GDP), production has continued its downward trend since 2023. This decline intensified in 2024, reaching a significant 7.9% drop in September, marking the fifth consecutive month of contraction. Manufacturing industries, especially for electrical equipment and automotive production, have been particularly affected by energy and trade restrictions induced by European sanctions on Russia. In 2021, 95% of the gas consumed in Hungary came from Russia. As at late 2024, dependency remains high at around two-thirds, leaving the country exposed to geopolitical vulnerabilities and price fluctuations. The contract with Gazprom governing the gas transit through Ukraine expires on January 1, 2025. Investment in construction has also been affected. After contracting 5.6% in 2023, construction is reviving thanks to monetary easing, Chinese greenfield investments and costs in deflationary mode. Labour costs remain high, however.

Furthermore, the structure of exports, which account for 80% of GDP – automotive representing slightly less than a third of the total – is heavily concentrated on Germany and the rest of eurozone, making Hungary's economy sensitive to weak European demand and supply chain disruptions. In response to these challenges, Hungary is focusing on diversifying its economic partners by attracting massive Chinese investments. In 2023, China accounted for nearly three-quarters of foreign investments in the country on major projects such as the CATL battery plant in Debrecen (EUR 7.3 billion) and the BYD electric vehicle factory in Szeged. These initiatives could reduce economic dependence on Europe, but their success depends on developing suitable infrastructure and ensuring a qualified workforce to support these strategic projects. Given its sluggish growth drivers related to the limited improvement in its trading partners’ activity and uncertainty over access to EU funds, Hungary's economic recovery is likely to remain modest in 2025 and may not pick up until the second half of the year. Germany, its main partner, seems poised to see a marginal improvement especially in its automotive industry with which Hungarian trade is particularly important, accounting for a quarter of total exports. Moreover, Donald Trump’s return as President of the US could also weigh through the introduction of trade tariffs. Conversely, the influx of massive Chinese investments could offset these challenges.

Budget consolidation to continue

The Covid-19 crisis interrupted eight years of fiscal consolidation and again made public finances a cause for concern. Although slightly narrower compared to 2023, the deficit remains particularly high and is above the EU's set threshold. The deterioration, initiated by the pandemic and exacerbated by costly support policies, continues to weigh on the fiscal balance. Efforts to control expenditures have been hindered by energy subsidies, support to the economy in recession, and the current perspective of legislative elections in 2026. Despite some initiatives to boost revenue such as temporary taxes targeting the energy, banking, telecommunications, and aviation sectors, these revenues remain insufficient to offset the scale of the deficits nor to ensure sustainable consolidation. The gradual recovery in domestic consumption supported by controlled inflation and improved purchasing power is expected to boost tax revenue growth in 2025. This momentum could be further enhanced by a stabilisation in industrial production, particularly in strategic sectors such as automotive and electronics which have benefited from recent foreign investments. Additionally, better management of public spending, focused on reducing energy subsidies and more effectively targeting resources, could help ease fiscal pressures. If these efforts are accompanied by the release of EU funds, the government may succeed in achieving strong fiscal consolidation and manage a sustainable economic recovery.

On the external front, forint depreciation, which has pushed up import and external debt servicing costs, together with lacklustre automotive exports, have weighed on the current account. The situation has been offset by a smaller energy import bill. Moreover, the tourism sector experienced a robust recovery in 2024 and significantly boosted the services surplus which rose by 11% compared to 2023. This growth was largely driven by international visitors, with Budapest accounting for 40% of tourist activity. The government actively supports this strategic sector which contributes 6.2% to GDP and employs nearly 400,000 people. Hungary’s dependence on foreign direct investment (FDI), mainly from Asia, and its high external debt related to these FDIs and the government both underscore the fragility of its position. The improvement in foreign exchange reserves is providing some short-term security but does not eliminate concerns about vulnerability to external shocks. Additionally, Hungary reduced the share of public debt denominated in foreign currencies to 29% in September 2024, from 50% in 2011.

Fidesz’s complete dominance is weakening

The political scene continues to be marked by growing tensions, both domestically and internationally. Viktor Orbán's government, led by the right-wing populist and national-conservative Fidesz-Hungarian Civic Union (Fidesz) party, has dominated the political landscape since 2010, but its supremacy is being increasingly challenged. In the October 2024 local elections, the opposition, led by the moderate centre-right Tisza party headed by Péter Magyar, made significant inroads in major cities, but less so in rural areas. The Tisza party positions itself as a "third political force" aiming to unify Hungarians across a wide spectrum and restore democratic standards.

Relations between Budapest and Brussels remain tense, with the latter criticising Fidesz's policies, particularly those affecting the rule of law, and restricting European funding. Hungary’s presidency of the EU Council in the second half of 2024 did little to ease these tensions. Absence of the separation of powers, reduced media pluralism, and a lack of transparency in managing public funds have eroded investor confidence to a certain degree. Regionally, disparities remain a significant challenge. While Budapest and other major cities benefit from economic robustness, rural areas are struggling with high unemployment, growing inequalities, and limited access to resources. Despite these hardships, rural communities continue to support Fidesz due to its emphasis on traditional values, dominance in local media, and targeted policies such as family benefits and public work programmes. These strategies strengthen loyalty and are aligned with cultural priorities even in the face of economic hardship.

In 2025, Hungary will face significant political challenges to improve its economy and international image. The government's current approach, focused on strategic alliances with China and Russia, may hinder relations with its European counterparts. Meanwhile, the rise of a more structured opposition could reshape the political landscape in the medium term, offering a credible alternative to Fidesz's dominance. The next parliamentary elections are scheduled for April 2026.

Last updated: December 2024