Hungary's central bank (MNB) has sharply downgraded its economic forecasts, warning that inflation will remain elevated for longer than expected while growth prospects continue to dim amid weak investment and a fragile external environment. Beside its rather bearish baseline scenario, the MNB has drawn up alternative projections in case the trade war escalates, which could potentially knock 0.5pp off this year's growth.

In its latest quarterly Inflation Report, the Hungarian National Bank (MNB) revised its 2025 GDP growth projection downward to a range of 1.9-2.9%, a significant downgrade from earlier estimates. The inflation outlook has also deteriorated, with the bank expecting headline CPI to rise by 4.5-5.1% this year, well above the government's previous target of 3.2%.

The budget deficit is expected to be between 3.5% and 4.3% of GDP.

The updated data shows that what was once a crisis scenario is now the best Hungary's economy can hope for. Viktor Orban at the end of 2024 spoke of a flying start to the economy and a "fantastic year" ahead, but Q1 data have disappointed.

The latest figures show that the MNB expects 2025 to be worse in nearly every aspect than the government had anticipated when drafting the budget – ironically, a budget overseen by Mihaly Varga under his previous role as finance minister. The government approved the 2025 budget with a 3.2% inflation target and assumed 3.4% growth, and a 3.7% deficit. With just three months into the year, all these targets need revision.

Even compared to the MNB's last forecast in December under former MNB governor Gyorgy Matolcsy, the outlook has significantly worsened. That report had projected inflation at 3.3-4.1% and GDP growth between 2.6-3.6%, which was already a downgrade from an even earlier September projection.

The MNB expects GDP to bounce back to 3.7-4.7% in 2026, as external demand improves and large-scale industrial investments come online.

According to the report, early-year price adjustments were larger than expected, pushing the overall inflation trajectory higher for the year.

Inflation is expected to decelerate from 5.6% in February this year, falling below its 4% tolerance band in early 2026, at earliest.

The MNB forecast an overall higher inflationary trajectory in its updated forecast. Headline annual inflation is seen decelerating to 2.9-3.9% in 2026, compared to the December estimate of 2.5-3.5%. Policymakers left their 2027 outlook unchanged at 2.5-3.5%. 

The bank estimates that recently introduced food price margin caps will reduce inflation by 0.8pp in April and May. The government-mandated cap on markups in 30 product categories affecting some 1,000 products has reduced prices by an average of 17.7%, according to government officials. Retailers warned that the measure could have far-reaching consequences for less capitalised smaller shops.

The MNB also assessed the government's latest fiscal measures, extending exemptions from the personal income tax to all mothers with a lifelong exemption for those with at least two children until 2029. The 2025 budget shortfall due to these measures will only be 0.1% of GDP, but between 2026 and 2029, the loss will increase to 0.5-0.9% of GDP annually.

ESA-based deficit is seen falling from 3.5-4.3% in 2025 to 3.2-4.2% in 2026, above the government's forecast. The cabinet pledged to the European Commission to bring the deficit below 3% next year to comply with the EDP.

In 2024, the volume of gross fixed capital formation fell by 11.3% overall. This year, household and business investment are expected to stagnate, while public investment is expected to fall. MNB expects investment volume to rise 3.0-5.8% with a more balanced structure.

Average wages are forecasted to grow by 9.5-10.3%, meaning real income growth will be 2.9-3.7% when adjusted for inflation. Employment will stagnate at best, with the worst projection showing a 0.4% decline.

Hungary's external position continues to improve, with a current account surplus projected at 1.2-2.6% of GDP in 2025. A temporary decline in the surplus is expected as domestic demand rebounds, but export growth should ensure a sustained positive balance from 2026 onward. The current account surplus is projected to rise to 1.8-3.4% in 2026 and 2.0-3.8% in 2027.

The debt-to-GDP ratio to decrease to 73.2% by the end of the year, to decline steadily, dipping below 69% by the end of the forecast period.

Beyond domestic headwinds, Hungary faces growing risks from external factors, including potential disruptions from US trade policies.

The MNB has warned that an escalation in US-EU trade tensions could knock 0.5pp off Hungary's GDP growth, with key export industries – such as automotive and machinery manufacturing – particularly vulnerable to tariffs and supply chain disruptions.

Policymakers mapped out four alternative economic scenarios. A full-blown U.S.-EU trade war would shave 0.5pp off Hungarian GDP growth while pushing inflation up by 0.2pp. Prolonged instability in emerging markets could have a similar impact, with a 0.5pp drop in growth and a 0.4pp rise in inflation.

Conversely, an EU fiscal stimulus in response to US policies would lift GDP growth by 0.5pp, though inflation would tick up by 0.2pp. The most favourable outcome – the de-escalation of geopolitical tensions – could add 0.4pp to GDP growth while easing inflation by the same margin.

Policymakers have also assessed Hungary's industrial exposure to the U.S. economy, with troubling results: eight of the ten most vulnerable sectors are already in Trump's crosshairs for potential tariffs.