All eyes on the budget, debt ratings and the ballot boxes
Our quarterly forecast update is based on two main technical assumptions. One is that US and, indirectly, global trade policies will remain the same as they were known at the end of September 2025. This should include primarily the tariffs agreed between the US and the EU during the summer, and also the reversal of the most recently announced hostile tariffs and non-tariff trade barriers between the US and China, as something that would not be sustainable anyway. The other is the assumption of the continuation of the Fidesz government after the April 2026 election. We emphasize that these assumptions are purely technical and are only used here to keep the forecast on the basis of known facts and reasonably predictable future actions, rather than going into forecasting the Trump government’s frequent policy zigzags, or into arbitrarily speculating on the currently non-existent framework for a potential Tisza government’s economic policies.
As for the main points of this update, issues in the energy sector will be most likely centered around the ongoing push by the US and the EU for everyone in Europe, including Hungary, to discontinue the purchase of Russian oil and gas. The latter will not have to happen even partially before end-2026, but we think Hungary’s energy policies will have to move in that direction without further hesitation.
Regarding growth, the official forecasts finally look much more realistic than previously, but they are still too optimistic about the speed of recovery in 2026, mainly because of the high hopes attached to the entry of new industrial capacity and to the impact of the government’s campaign measures on consumption and residential housing. We, on the other side, see only limited scope for a recovery next year, given the bleak prospects for agriculture and for the European economy, the considerable inertia seen in housing construction, and the commanding necessity of tightening fiscal policy after the election.
This year’s fiscal situation is not entirely clear, because of a major conflict between the deficit numbers by national and Eurostat definitions in H1. But it is very clear that the government is preparing for a major loosening in H2 and the early part of 2026. However, the government will have to hit the brakes hard, and possibly even backpedal on some of its election campaign gifts, right after the election, with a view to keeping its investment grade debt rating. The risks around its ability to keep reducing the deficit ratio and to avoid a rise in the debt ratio will remain quite significant.
The volume of imports' expanding faster than the volume of exports points to a deteriorating trend in the balance of payments. However, this year’s BOP was saved by a significant improvement in Hungary’s terms of trade, essentially keeping external accounts in balance. In 2026, deterioration is indeed likely to take over, but unless a marked turnaround takes place in external conditions, the negative shift in the BOP will be probably very moderate.
The inflation picture remains controversial. On one hand, the headline rate of CPI-inflation is just above the MNB’s medium-term target ceiling, and core inflation has fallen to marginally within the target range. But on the other hand, this situation is based on a series of administrative price controls; wage growth and perceived inflation are quite high, and the government is actually fueling inflation with its election campaign measures, especially its new facility of cheap mortgage loans. Assuming the continuation of the current high base rate/strong forint policy, inflation could still decrease a bit in 2026, but not a lot in the end, as the government will likely be forced to ease price controls after the election, to bring the affected retailers out of their loss-making positions.
Despite the Economy Minister’s recent call for a moderately lower MNB base rate, Fidesz remains deeply interested in keeping inflation down for political reasons, whatever the growth and fiscal consequences of MNB tightness may be. This, and concerns about rating agency decisions should keep Governor Varga in a strong enough position to keep the base rate at an unchanged level between now and election time. A small and cautious reduction of the base rate may indeed take place in H2 2026, if and when fiscal policy is tightened substantially again.
In foreign diplomacy, PM Orbán’s positions remain as poor as ever, but no dramatic breaks are likely. Cooperation with NATO and on defense issues within the EU continue, but no prospect is seen for further releases of the currently blocked EU funds. Hungary continues to be pushed further on the road to give up the import of Russian gas and oil completely, and the EU is seen devising techniques to circumvent Hungary’s vetoes in the European Council, most notably on assistance to, and accession talks with, Ukraine. The outcome of the recent election in Czechia was favorable for Mr. Orbán, but is unlikely to change much in the big European power game.
Election chances for Fidesz and the main opposition force look nearly even for the moment, even though recently the odds moved a bit in Tisza’s favor, and the latter seems to be a bit more likely to win in April. However, election campaigns tend to be unpredictable, and Fidesz is yet to deliver the majority of its fiscal campaign gifts to voters. Anyway, the upcoming vote will be very different from the previous four parliamentary elections, when the only real question always was how big a majority Fidesz would be able to gain in the end.
Now read on...
Register to sample a report