Hungary: Recovery delayed for another year

We have further revised our 2025 growth forecast downward, lowering it from 0.8% to 0.5%. This adjustment reflects the persistent lack of improvement in the short-term outlook for the industrial sector. Nevertheless, household consumption is expected to remain the primary driver of growth in 2025, supported by continued positive real wage developments and the initial steps of pre-election fiscal easing. In 2026, GDP is projected to expand by 2.3%, assuming that investment activity bottoms out this year.

In August, headline inflation stood at 4.3% year-on-year, while core inflation eased slightly to 3.9%. The disinflationary trend is underpinned by a stable forint, easing labor market tightness, and favorable developments in producer and import prices. However, upside risks persist due to pre-election fiscal measures and elevated inflation expectations. Our forecast for the 2025 annual average inflation rate stands at 4.7%. Stability remains the key word in the monetary policy. Given intensified rate cut expectations by the Fed, stronger forint and more balanced inflation risks, a cautious rate cut appears justified at the year-end, although it may be postponed to 1Q26. However, still high inflation expectations among households and businesses warrant a cautious approach. Rate cuts in 2026 are also likely to be less intense than previously anticipated. The forint has appreciated significantly this year, primarily driven by favorable carry trade dynamics. Additionally, monetary policy has placed increased emphasis on exchange rate stability. While structural challenges suggest a gradual weakening of the forint over the medium term, this depreciation is expected to be less pronounced than previously anticipated.   

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