Hungary: At a glance
- Third-quarter GDP growth came as a negative surprise with a quarter-on-quarter stagnation. The weak outing and the lack of green shoots pushed us to downgrade the outlook to 0.5% and 2.3% in 2025–2026, a 0.2–0.2ppt downgrade respectively.
- Retail sales are still the bright spot, while all the other sectors, such as agriculture, industry and construction, are suffering for various reasons.
- The labour market is still tight as demand and supply shrink in parallel. Corporates are facing tough decisions next year with looming double-digit minimum wage increases in 2026 and 2027.
- External balances are still looking good, but it is rather because of the lack of domestic demand limiting import growth, while export lacks external demand.
- We overhauled our inflation forecast as mandatory margin freezes on food and household goods were extended and expanded to more food items. After a 3.6% average inflation next year, we see an acceleration to 4.3% in 2027.
- The central bank will look through the inflation dip in early 2026, with inflation likely to heat up at the end of the monetary policy horizon. We now forecast a 6.00% base rate by the end of 2026, 50bp higher than our previous call.
- We continue to see a fiscal slippage of around 0.5% of GDP in 2025 and only a minor improvement in the budget balance next year, which is an election year. We forecast a 4.6 and 4.5% deficit-to-GDP ratio in 2026-2027 with no financing issues.
- The forint remains supported by favourable positioning and carry appeal going into the year-end, and we predict range trading of EUR/HUF in the 385-395 range in 2026.
- The IRS curve will price in more NBH rate cuts amid expectations of lower inflation in Q1 2026 and a weak economy, resulting in a steepening. Bonds look cheap vs. CEE peers, but the term premium is unwinding only slowly.
Hungary's economy can't find its way out
In the third quarter of 2025, the Hungarian economy failed to grow on a quarterly basis. While it is worth noting that the year-on-year index improved from the second quarter, this is only due to the base effect. This 0.6% growth in 3Q is hardly impressive, and the overall picture remains disappointing.
The economy's performance was held back most by agriculture and industry, while services contributed positively. Based on third-quarter data, we have revised our 2025 growth forecast downwards once again. The Hungarian economy is expected to grow by around 0.5% this year. This is calculated based on a strong fourth-quarter showing in government measures to boost consumption. Due to the weaker carry-over effect and lack of green shoots in sectors, we now expect a growth rate of 2.3% in 2026, an 0.2ppt downward revision.
Industry once again on downward trajectory
After the positive surprise in July, August brought a negative correction in Hungarian industry. However, the weak performance is hardly surprising, given that this is the typical period for summer shutdowns. Production is currently 4.6% lower than last year and 8.2% lower than the monthly average for 2021. Production declined in all sub-sectors except electronics. Output in vehicle manufacturing fell significantly.
Furthermore, German industrial order data suggests that order books are empty, which does not bode well for the short-term future of the export sector. The industry is expected to negatively impact Hungary’s economy in 2025, though 2026 could see a slight improvement. However, we only see a modestly positive impact on GDP growth.
Retail data may indicate the start of a positive trend
Following a weak performance in July, Hungarian retail sales recovered in August. Sales volume increased by 0.8% month-on-month, surpassing market expectations. Although there have been some fluctuations, retail sales volume has been growing steadily since the end of 2023. However, the fixed-base index remains below this year's April peak and has fluctuated within a range since then, raising concerns. Nevertheless, we can conclude that retail sales remain a positive factor for the economy.
Some government measures have already affected households' finances, and more impactful measures will boost the sector's performance in the coming months. It is worth noting that consumer confidence remains relatively low, though it has shown some improvement, which supports the positive outlook here.
The labour market situation is heating up
The unemployment rate rose to 4.5% between July and September, with the number of people in employment continuing to decrease to its lowest level since the beginning of 2022. This is due to demographic trends and a slowdown in labour market activity. There is no evidence of a drastic change in the employment rate itself. The stagnation of the employment rate indicates that supply constraints are becoming increasingly prevalent in the Hungarian labour market.
Demand is also weakening alongside supply due to economic stagnation since mid-2022. With expected minimal wage increases of over 10% in 2026 and 2027, companies are facing a significant challenge, which could result in layoffs and/or price increases. We predict that the unemployment rate will remain at around 4.5% for the rest of the year, before slipping to 4.3% by the end of 2026
Current account balance remains in surplus
During the first nine months of 2025, export volumes stagnated while imports increased by 2.1% year-on-year. The external goods balance is now only €0.7 billion higher than a year ago, standing at €7.8 billion. Looking ahead, it is increasingly unlikely that new export-oriented manufacturing production capacities will emerge in the economy this year. However, despite some issues with order books, next year will see some improvement in the form of factory openings, albeit less than we had expected earlier.
Taking this into account alongside the expected increase in domestic demand (mostly consumption), net exports will remain a minor drag on growth in 2026. Consequently, both the trade and current account balances will remain comfortably in surplus, providing a welcome offset to the overall negative picture of economic performance
Inflation picture gets more complicated
The latest headline inflation was in line with expectations at 4.3% in September, showing stability for three months. Despite the government’s price shield measures, inflation remains above the central bank’s tolerance band, and Hungary continues to have high structural inflation. In more detail, we saw an upside surprise in consumer durables, while the fuel group pulled inflation back the most in September. Despite four months of low repricing, households’ inflation expectations have not improved.
The announcement of the extension of margin freezes (until the end of February) and the addition of 14 new items to the list (more food products) made us change our forecast. We now expect inflation to fall to 2.2% on average in 1Q26 followed by a significant acceleration, hitting 5% YoY in the year-end. After an average of 3.6% in 2026, we see an uptick to 4.3% in 2027 as companies adjust prices after the end of price shield measures.
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