Standing on Budapest’s Fisherman’s Bastion looking towards Hungary’s magnificent parliament building, there are no signs at all that the country’s economy is currently on a rollercoaster ride and that ordinary Hungarians are feeling the pinch.
Restaurants, bars and sörözőéi do good business, well-heeled tourists come and go through the revolving doors of the nearby Hilton hotel. The August sun shines, all looks well.
But in supermarkets, prices continue to rise. Food costs surged in July after the government ended mandatory discounts on basic staples.
As the cost of living continues to rise, straining household budgets, the government’s policy responses in the coming months will be critical in shaping the country’s economic future, with a focus on maintaining stability, encouraging investment, and ensuring that the benefits of the modest recovery—if maintained—are broadly shared across society.
And it’s a big ‘if’. Growth has recovered a little following a fall in GDP of 0.9 per cent in 2023, but the Hungarian economy disappointed in the second quarter of 2024, contracting by 0.2 per cent quarter-on-quarter following a 0.8 per cent expansion in the first three months of the year.
“The contraction marks a continuation of the seesaw pattern of growth that Hungary has been experiencing in recent quarters,” according to Fitch, a ratings agency.
“Retail sales and consumer confidence data suggest that private consumption will struggle to recover in the near-term,” Fitch continues.
The continuation of the alternating pattern rather than a return to a more sustained pace of growth has therefore prompted the agency to revise its 2024 forecast down from 2.1 per cent to 1.9 per cent.
ING, a bank, meanwhile suggests that inflation remains an issue, warning that, “the headline rate [is expected] to creep back above five per cent by December”. In July, consumer prices rose an annual 4.1 per cent compared with 3.7 per cent in June, according to the country’s national statistics office.
Hungary currently has the EU’s highest interest rates, of 6.75 per cent.
FDI
Hungary’s central European location and high-quality infrastructure have long made it an attractive destination for foreign direct investment (FDI), something that Hungary’s government has long touted as evidence that its eternal disputes with Brussels have not deterred foreign investors.
However, there is increasing concern among investors at the Hungarian government’s promotion of domestic ownership at the expense of foreign investors in the banking, media, energy, retail, utilities, telecommunications, and insurance sectors.
According to the International Monetary Fund (IMF), direct FDI in Hungary fell sharply in 2023, to 3.66 billion US dollars (its lowest level since 2019). For 2022, the figure was over 14 billion US dollars.
In June, Ferenc Liszt International Airport in Budapest was returned to majority state ownership for the first time since 2005 when Corvinus, an investment fund owned and managed by the Hungarian state, took an 80 per cent stake, with French infrastructure giant Vinci Airports acquiring the remaining 20 per cent and becoming the airport’s operator.
The purchase, said Hungarian Prime Minister Viktor Orbán, corrected an “unforgiveable mistake”, referring to the sale of the airport by Hungary’s then Socialist government in 2005.
Orbán has long sought to bring key pieces of Hungarian infrastructure, as well as strategic business sectors, under government control, bucking the trend of other countries in emerging Europe which have broadly sought to sell off remaining state assets. Hungary has instead taken over energy and utilities firms, part of the banking sector, and telecommunications.
At times, these takeovers have been hostile. “Foreign investors—the backbone of the Hungarian economy—face strong pressure to sell to Hungarian companies linked to those oligarchs,” noted BertelsmannStiftung, a German think tank, in its latest, 2024, review of the Hungarian economy. “If they refuse, they are likely to face extraordinary tax authority scrutiny and audit measures.”
Little room for manoeuvre
One of the key challenges for the Hungarian government moving forward will be balancing fiscal discipline with the need to support growth and social welfare.
The government’s ability to maintain public investments, particularly in infrastructure and education, will be crucial for long-term economic resilience. Moreover, structural reforms aimed at improving productivity and labor market participation are necessary to ensure sustainable growth.
Unfortunately, there’s little room for manoeuvre. The budget deficit rose to 6.7 per cent of GDP in 2023, up from 6.2 per cent in 2022.
“The large budget slippage can be attributed to the underperformance of revenue, reflecting weaker-than-expected economic performance, and to expenditure overruns, in particular on interest, pensions and public wages,” suggested the European Commission in its latest economic forecast for Hungary.
In 2024, the deficit is forecast to decrease to 5.4 per cent of GDP, driven by the recovering economy and by lower projected subsidies to utility companies to cover their losses from regulated energy prices.
Capital expenditure is projected to remain subdued in line with some announced postponements in nationally financed public investments.
A vanity project Hungary can ill afford
In December 2023, the EU unblocked 10.2 billion euros of cohesion funding for Hungary after Budapest made some reforms to its judicial system, but further relief from Brussles is unlikely.
The EU continues to suspend 11.7 billion euros worth of funds budgeted for Hungary amid concerns over the rule of law, the rights of civil society organisations, academic and media freedom, and the rights of migrants and asylum seekers and of the LGBT+ community.
The money was frozen in December 2022,
In addition, Hungary is still unable to access its Covid-19 recovery and resilience funding, worth 10.4 billion euros in grants and low-interest loans.
So far, just 920 million euros has been paid out in “pre-financing” to provide liquidity for certain energy projects.
Budapest currently holds the rotating, agenda-setting six-month presidency of the Council of the European Union but has so far done little except further alienate its European partners.
Just days after taking over the presidency on July 1, Orbán made high profile visits to Moscow and Beijing, meeting both Vladimir Putin and Xi Jinping.
While Orbán’s overtures to Russia and China might be driven by a desire to carve out a more autonomous path for Hungary, by aligning more closely with Moscow and Beijing, Hungary risks alienating its Western allies, which could lead to a further reduction in financial support from the EU.
This is particularly concerning given Hungary’s economic reliance on EU markets—over 70 per cent of Hungary’s exports go to the EU, and a significant portion of its GDP is tied to EU trade.
With his country’s economy in such a precarious state, Orbán’s political grandstanding increasingly looks like a vanity project Hungary can ill afford.
