With a prolonged recession last year, the Hungarian government announced a comprehensive program in October 2024 to reignite the economy this year. Prime Minister Viktor Orbán promised that results would be visible as early as the first quarter, with annual GDP growth of at least 3%, possibly even 6%.
While GDP did manage to break the 0% barrier in Q4 2024, the data for Q1 2025 proved a cold shock to economic governance: -0.4%. This figure not only contradicted the Prime Minister’s promise of spectacular growth but also challenged this year’s forecasts. The full-year growth of 3.4% projected in the budget now appears unrealistic; perhaps even 2.5% may be out of reach.
This is bad news for a government preparing for elections in 2026, in a country with a history of generous pre-election spending. Before the 2022 elections, the Orbán cabinet spent HUF 1 trillion across various social groups. Back then, more than 5% GDP growth provided the necessary fiscal space. This year, however, the situation is different.
GDP growth is not only an electoral issue. A low growth rate means that businesses have limited scope for wage increases, which, when combined with accelerating inflation, erodes real incomes. Given the government’s visibly constrained ability to stimulate growth, its only remaining lever is tackling inflation, which stood at 4.7% in March.
To address this, the cabinet chose an instrument previously shown to be of limited effectiveness, albeit now in a revised form. Instead of capping product prices directly (as happened when inflation peaked alarmingly during the economic shock that followed in the wake of Russia’s full-scale invasion of Ukraine), the new measure targets profit margins, setting a maximum of 10% on 30 essential items.
April’s inflation data showed some progress, with the rate easing to 4.2%, the lowest since November last year, though still not back within the official 2-4% target range of the National Bank of Hungary (MNB). Year-on-year, food prices in April rose 5.4%, services by 7%, alcoholic beverages and tobacco by 6.3%, and household energy by 3.5%. Compared to March, food prices were actually down by 1.3%. This suggests that the profit margin cap may be helping to reduce prices. Fuel prices also contributed, with petrol down 7.1% year-on-year and 1.4% month-on-month.
However, according to sales data, consumers remain unmoved by the modestly improved prices. The Central Statistical Office (KSH) reported on May 7 that retail sales in March were down 0.4% from February, and only 0.4% higher than in March 2024. Péter Virovácz, an analyst at ING, commented: “Looking at the retail data from the first three months of this year, after a spike in January, the sector has failed to stabilize.” Consumer confidence remains far below the highs of 2018-2019, and saving clearly takes precedence over spending.
“The most surprising thing is that the profit margin cap introduced in mid-March has been unable to reignite the retail sector,” Virovácz added. Income inequality is also hindering the recovery in consumption. Market research institute GKI analyzed KSH data and found that a worrisome two-thirds of Hungarian employees earn less than the gross average wage.
According to GKI, the bottom 10% of earners account for just 3.5% of total income, while the top 10% receive 28.1%, an eightfold disparity. In fact, the top 10% of full-time employees collectively earn more than the entire bottom 50%. This also helps explain weaker-than-expected consumer spending.
“A fundamental principle in economics is that lower-income individuals tend to spend a greater proportion of their income, while higher earners are more likely to save. As a result, widening income inequality can have a negative impact on retail turnover and other consumption indicators,” GKI noted. Compared to 2023, the lowest earners saw their gross monthly income rise by HUF 29,500, while those at the top gained HUF 166,600 per month.
“Beyond questions of social fairness, income inequality dampens domestic consumption, as a smaller share of income goes to those most likely to spend it,” GKI concluded.
Meanwhile, consumers are increasingly turning to credit. In March, families took out personal loans totaling more than HUF 90 billion, an unprecedented figure, according to Bank360. The average value per loan contract rose to HUF 3.3 million.
Mortgage lending reached HUF 137 billion in March, the highest in three years, with an average contract value of HUF 19.9 million. This indicates a rise in property prices. In January-February 2024, the average mortgage contract value was HUF 14.6 mln, suggesting that borrowers are seeking higher loans to keep pace with housing costs. As the MNB is not expected to reduce its base rate any time soon, loan interest rates, which currently range from 6.18% to 7.99%, are likely to increase further.
While households may feel secure in managing loan repayments, the government is facing mounting fiscal difficulties. By April, the general budget deficit had already reached 71% of the annual target. With consumer spending low, VAT revenues are lagging. Nevertheless, Minister for National Economy Márton Nagy recently claimed that “Budget revenue rose in line with expectations, supported by increasing consumption, even as GDP underperformed.”
On May 13, Nagy confirmed that Hungary had requested the activation of an EU “escape clause” to allow for greater fiscal flexibility in defense spending, effectively permitting a higher deficit.
This article was first published in the Budapest Business Journal print issue of May 16, 2025.
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