MBH Bank: improving economic outlook, expanding investment while temporarily rising inflation expected in 2025

Real wage growth, stabilising investment and a further pick-up in consumption are expected in 2025, leading to a more favourable outlook for economic performance compared to 2024, MBH Bank said at its latest macroeconomic forecast press event. According to the latest forecast by MBH Analysis Centre, economic growth could reach 4 percent by the last quarter of this year, while full-year GDP growth could be around 2.6 percent. The economy's path is also supported by a slowly improving external environment, while inflationary pressures remain strong.⁣

New industrial projects could boost growth⁣

The Hungarian economy's outlook for 2025 is more favourable than last year, mainly due to stronger domestic demand driven by an expected pick-up in consumption. Investments are expected to stabilise this year, as more than HUF 1,400 billion of funds are expected to flow into the economy through the Sándor Demján Sándor Programme in the form of preferential investment loans, leasing and capital programmes, and partly non-repayable grants. "Rising real wages, the increase in the family tax credit, payments and maturities on government bonds and the workers' loans could all further boost domestic demand, pushing economic growth up to 4 percent by the end of this year. However, we have revised our forecast for annual GDP growth to 2.6 percent due to the only slowly improving external environment and the slower pick-up in large automotive investment,"⁣ said Zoltán Árokszállási, Director of MBH Analysis Centre.

An important development is the recent increase in the chances of ending the Russian-Ukrainian war in the foreseeable future. This could have a significant positive impact on economic growth through lower energy prices, improved investor sentiment and, through this, a stabilisation of the forint exchange rate.

Wage increase could outpace inflation⁣

In July 2024, the labour market showed a steady increase in employment, but from August onwards it started to gradually decline. The unemployment rate reached 4.5 percent in the autumn months, before falling to 4.3 percent in December. In the coming months, the unemployment rate could rise by a few tenths of a percentage point more, reflecting the usual seasonal effects and the recent adverse economic environment. By the end of 2025, however, with the gradual recovery of the economy, the average unemployment rate is forecast to stabilise at 4.3%, a small but steady decline from the 4.4 percent recorded in 2024. Wage dynamics are expected to continue to exceed inflation, which could lead to an increase in household disposable income.

Temporary rise in inflation⁣

Last year, prices in Hungary rose by 3.7 percent on average, with inflation reaching its most favourable level in September, when it fell back to the 3 percent target. Thereafter, inflation rose gradually in the fourth quarter, partly driven by base effects and partly by the weakening of the forint. Prices rose by 4.6 percent in December and by 5.5 percent in January this year compared to the same period last year, exceeding expectations.

According to analysts at the credit institution, in addition to the larger-than-expected rise in food prices, the change in the price of services was a particular surprise. The inflation outlook is still unfavourable, with experts expecting prices to rise above the MNB's inflation target range over the course of the year. "Following the January inflation data, we have raised our inflation expectations for 2025 from 4.1 percent to 4.6 percent," ⁣said Márta Balog-Béki, senior capital markets analyst at MBH Bank.

Wage growth dynamics are likely to remain high in the coming years, which will work against disinflation. As a consequence, analysts expect their forecast for average inflation in 2026 to be 3.4 percent - already within the central bank's inflation target range. The 3 percent inflation target could be reached in 2027.

Cautious interest rate policy in the light of the economic outlook⁣

"With inflation expectations remaining high, markets are questioning the Fed's ability to deliver two more rate cuts, and the forint exchange rate only started to strengthen in the second half of January,"⁣ said Márta Balog-Béki. According to the analyst, the Fed and the ECB are likely to continue their monetary policy divergence until the middle of this year, which will curb the weakening of the dollar.

According to the expectations, Hungary may have a chance to cut interest rates if the Fed is also able to cut its policy rate below 4 percent and international risk appetite does not deteriorate drastically. Given the high inflation path, the MNB is expected to announce a small rate cut at the end of the year: MBH Bank experts expect the base rate to reach 6.25 percent by the end of 2025 and 5.25 percent by the end of 2026.

Stabilising forint, strengthening euro-forint exchange rate⁣

The forint has shown strong volatility in recent months, with a weakening in autumn followed by a strengthening from mid-January. Given inflationary pressures, the MNB will need to continue its interest rate policy to counter further weakening of the forint, so analysts expect a stronger exchange rate than seen at the beginning of 2025. The average exchange rate against the euro could be around HUF 404 in 2025 and HUF 407.5 in 2026. If the Russian-Ukrainian conflict were to end quickly, this could lead to a stronger forint path than this, so this factor appears as a fresh positive risk in the forecast.

"Factors strengthening the forint include a current account surplus, a decreasing fiscal deficit and a meaningful positive interest premium. Another important development is the recent increase in the likelihood that the Russia-Ukraine war could soon be replaced by a ceasefire or even a more durable peace. If a lasting peace were indeed to come quickly, there could be a chance of a euro exchange rate below HUF 400 for a longer period. Although the forint remains sensitive to global economic events, the tighter tone of the MNB and more favourable investor sentiment mean that no significant weakening is expected in the near term,"⁣ explained Zoltán Árokszállási.

Improving budget balance, declining debt ratio⁣

The budget deficit for 2024 has been increased to HUF 4,096 billion in cash terms, while in accrual terms the Ministry expects a deficit of 4.8 percent of GDP, slightly above the planned target of 4.5 percent. However, there has been a significant improvement compared to the 6.7 percent deficit in 2023, made possible by tight cost control and deficit reduction measures.

The projected economic growth in 2025 and declining interest expenditure could in themselves have a positive impact on the budget, bringing the deficit down to around 4%. A further reduction in the deficit is expected by 2026, but the deficit is unlikely to reach below 3 percent. The debt ratio could decrease to 73.5 percent in 2025 and further decline in 2026 as GDP growth accelerates.