The Hungarian government has abandoned its ambitious GDP forecast less than a week after letting go of its 2024 budget targets.

At a press conference on March 12, Minister of National Economy Marton Nagy said the 4% growth forecast was no longer realistic. It was the first acknowledgment that the growth projections in the 2024 budget, approved in the summer of 2023, were untenable. He blamed the weaker outlook of Hungarian exporters due to the slowdown or recession of Hungary’s main markets in the EU, which accounts for 75% of exports.

Analysts forecast a 2.5-3% expansion this year,  as 2023 Q4 data showed that the economic rebound of the previous quarter stalled at the end of the year.  In a note published on Tuesday, Erste Bank said the economy is set to expand 2.0% after a 0.9% contraction in 2023. Hungary’s economy contracted 0.9% for the full year, ranking the country among the laggards in the EU.

The European Commission and the OECD put the country's GDP growth at 2.4% for this year in their latest forecast.

Nagy ruled out that the government would need to introduce austerity measures as suggested by former head of the central bank Akos Peter Bod in an opinion piece on financial website Portfolio.hu. It is possible to fine-tune the budget without resorting to austerity measures, as in the past, he added

There are growing concerns about Hungary’s fiscal position after a record HUF1.7 trillion (€4.3bn) budget deficit in February, which accounted for 68% of the full-year deficit target of HUF2.5 trillion, or 2.9% of GDP, according to the cash-flow-based methodology.

In a statement issued after the monthly report, the finance ministry said it expects the 2024 deficit to reach 4.5% this year. It should fall below the 3% ceiling required by the EU only in 2026.

The government and analysts attributed the massive budget gap last month to seasonal factors such as VAT refunds and the one-off 13th-month pension payment booked for the month, but around half of the deficit, HUF885bn came from interest payments to retail government bondholders.

Hungary’s debt service costs will remain the highest in the EU this year, estimated at 4.5% of the GDP

The data rang alarm bells and analysts said that meeting the revised 4.5% target would require fiscal consolidation to the tune of HUF1-1.2 trillion.

Less than three months before the European Parliament and local government elections, there is little chance the government will announce new measures, but the later it acts, the tougher it will be to keep the new deficit targets, analysts opined.

Given the state of the budget, there is little or no room at all for the government to continue stimulating demand by injecting more money into the economy in what has become known as a high-pressure economic model pursued by the cabinet, opined Akos Peter Bod.

The growth potential of the Hungarian economy is closer to 2%, given the current productivity and skill level of its workforce and high energy intensity of its manufacturing sector.

He also said that it is too early to claim victory on inflation as measures to curb the deficit with new taxes could elevate CPI.

At Tuesday’s press briefing, Nagy claimed that inflation has been tackled and lower commodity prices are preventing retail chains from raising prices. Lower inflation gives further room for the central bank to continue cutting interest rates, Nagy added.

The government hoped that rising real wages and a boost in consumption would lead to a rebound in growth, but as consumer sentiments began to improve, the country’s export-oriented manufacturing sector has faced sluggish demand.

Fiscal consolidation could also have a negative toll on growth, analysts warned.

Speaking after the Ecofin meeting on Tuesday in Brussels, Finance Minister Mihaly Varga said the government is "committed to restoring balance to the central budget as soon as possible and keeping the deficit as small as possible and the public debt on a downward path".

Economic growth depends greatly on when the war between Russia and Ukraine ends, he added.