How does the U.S. election outcome shape the outlook for the region? What should we expect by way of rate cuts from the Fed, the ECB, and the MNB? And what are Hungary’s growth prospects for 2025?

BBJ: How does the outcome of the U.S. election shape the outlook for the CEE region? What are the implications of slowing global trade for a small, open economy like Hungary?

Eszter Gárgyán: The CEE region is facing an increasingly challenging external environment. The extended weakness of the European automotive industry has been one of the primary sources of negative surprises this year and has been a drag on growth, given the integration into the German automotive supply chain. Decelerating consumption growth in China and falling European new car sales have contributed to weakening external demand. However, part of the underperformance of the European car industry is related to competitiveness, as European manufacturer’s global market share has shrunk significantly.

The proposed tariff hikes by President-elect Donald Trump (60% on U.S. imports from China and 10% from the EU) could create additional headwinds for the main manufacturing export products in the CEE, and regional producers’ participation in U.S. supply chains could weaken. The recently imposed EU tariffs on EV imports from China are only expected to provide a short-term advantage to European automakers. Still, they could promote further Chinese FDI investments in the CEE region, like the planned BYD factory in Hungary, to avoid import tariffs for the Chinese brands. Overall, the protectionist trade measures will likely lead to a further deceleration in global trade, which could be negative for the export-oriented CEE economies.

Secondly, there is the impact of higher U.S. dollar interest rates due to inflationary trade and fiscal policies in America and the parallel strengthening of the dollar, which constrains room for CEE central banks to cut rates without adding to depreciation pressures on their currencies. Therefore, following the U.S. election results, we have revised our growth forecasts lower and expect a weaker path for CEE exchange rates against the euro, not just the dollar.

The third factor to consider is the hardest to predict: a potential shift in geopolitical risks in the region if the new U.S. administration scales back support for Ukraine. The negotiating positions of Ukraine and Russia are so opposed that it seems unlikely an agreement to end the war could be reached in the short term or that a forced ceasefire could bring stability to the region.

BBJ: Should we expect further rate cuts from the Fed and ECB? Is the decline in core market rates creating space for the MNB to cut interest rates further?

EG: Given that the U.S. economy is close to full capacity and economic stimulus measures could add to inflationary pressures, we see diminishing room for rate cuts from the Fed next year and, in a risk scenario, the Fed might even consider rate hikes. The ECB will likely continue with gradual cuts towards, or slightly below, 2% amid weak European growth. The question is how far and how long the ECB can diverge from the Fed’s policy rate path, as historically, the two major central bank’s policy direction has been largely correlated.

Zsolt Becsey: Regarding the National Bank of Hungary (MNB), the room to cut will be minimal next year and will remain a function of core market developments. The current approach is rather reactive to depreciation FX episodes, and there is no question that this will remain the case until March of next year. After this point, the next MNB governor will likely endorse a more growth-supportive policy, but probably through liquidity instruments and targeted programs rather than outright rate cuts. We see a good likelihood that rates will average above 6% next year.

BBJ: What are Hungary’s growth prospects for 2025?

ZsB: Hungarian GDP has underperformed. We began the year with an average growth expectation of around 2%, but the latest quarterly growth data has fallen short. The government might inject some cash towards the end of the year, and retail consumption could remain strong. Together, the two will potentially keep the annual average growth in positive territory and avoid a repeated recession after last year’s -0.9%. Our concerns lie more with the outlook for next year.

While external demand might become more supportive, and new industrial capacities are expected to start production soon, internal challenges cloud the picture. Firstly, households’ inflation expectations are rising, indicating doubts about the country’s outlook. Even if the labor market remains tight, blue-collar workers could face layoffs if subdued export and construction demand persists. Secondly, households’ doubts about the inflation outlook are justified, especially after the government announced a series of tax increases and the continuation of extraordinary tax measures impacting some sectors. Thirdly, the economy is feeling the financial strain from the significantly reduced influx of EU funds. Companies are delaying investment plans since, in the last 20 years, Hungarian development policy has influenced companies’ investment decisions via the availability (or the lack of) different subsidized plans, which has led to a certain dependency on these schemes.

Looking ahead, the government must decide between the continuation of subsidized lending schemes and, thus, a higher deficit versus fewer subsidies, resulting in a lower deficit and market rates and more market-based investment financing. In the case of the first option, the result will depend on whether the companies use these funds to boost GDP sustainably or just to increase their savings. The second option is what we have seen realized in the last two years.

BBJ: Which factors do you expect to be key market movers in Hungary over the next year?

Attila Csáky: Europe, CEE, and specifically Hungary face challenges from a rapidly changing external environment. If the Fed slows down its rate-cutting cycle, U.S. rates could represent a strong alternative for international investors, who may continue to reduce their investments in CEE. Any escalation of the global geopolitical tension would result in the same investor reaction, which could put pressure on CEE markets, including Hungary. The MNB did not continue to cut rates in November and will need to stay in data-driven mode, keeping an eye on the EUR/HUF levels, too. EU funds would help to lower the pressure on the HUF, but that remains uncertain.

BBJ: Do you expect big moves in commodities or FX over the next 12 months?

ACs: We forecast a weakening EUR/HUF trend for 2025 to the 420-430 level. In such highly uncertain times, hedging FX and commodity risk is crucial for corporates to be able to focus on their core activities instead of bearing the risk of sudden market moves. Hungarian electricity prices have shown extreme moves in not-so-sunny weeks, which can also repeat in the winter months. We offer our clients financially settled instruments to hedge their electricity or gas bills even for a year ahead. Given that Hungarian electricity prices now show a deviation from German power prices, we offer HUPX-based pricing, which perfectly matches the Hungarian electricity market price mechanism.

This article was first published in the Budapest Business Journal print issue of December 13, 2024.