The latest projections indicate that Hungary is facing challenges in meeting its economic growth targets for a second consecutive year. The economy unexpectedly contracted in the second quarter, with the government attributing the weak performance to struggling industrial exports to western Europe, particularly Germany. Hungary's increasing reliance on electric-vehicle battery demand has also been affected by a slowdown in that sector, impacting the overall growth.
Finance Minister Mihaly Varga recently stated in an interview that GDP growth for next year is expected to be between 3.2% and 3.5%, falling short of the 4.1% projection in Hungary's annual convergence report to the European Union. Varga highlighted that industries such as manufacturing and construction are recovering at a slower pace than anticipated, emphasizing the need for cautious fiscal management.
With a general election approaching in early 2026, Prime Minister Viktor Orban's administration is under pressure to stimulate the economy. Orban's Fidesz party, which has been in power since 2010, faces a challenge from Peter Magyar's rising Tisza party. Magyar's recent electoral successes, coupled with public discontent over economic conditions and governance issues, have opened up the possibility of a viable alternative to the ruling party.
The government has revised its economic growth forecast for this year to 1.7% to 2%, significantly lower than the initial 4% target. Efforts are underway to reduce the budget deficit to 4.5% this year, followed by targets of 3.7% in 2023 and 2.9% in 2026. Hungary is also under scrutiny from the EU after being included in a group of countries facing an excessive deficit procedure, necessitating corrective actions to avoid potential penalties.
Despite challenges, Hungary saw a record cash-flow based deficit in the first half of the year, which was partially offset by a surplus in July. The government has implemented tax increases and spending cuts to address the deficit, with estimated savings of 1 trillion forint. Minister Varga expressed optimism about the fiscal measures contributing to meeting deficit targets, signaling progress amidst economic headwinds.